More and more trustees are having to look at their end game strategy partly due to their schemes maturing, funding levels improving and the introduction of the long term objective in the Pension Schemes Act 2021. In this blog post we look at the legal principles that apply for trustees navigating their end game strategy.

Legal background

Legislation does not prescribe what a scheme’s end game should be and normally neither will the scheme’s trust deed and rules. This means that trustees need to make a decision. With ever increasing options for trustees, this can be a difficult choice. In practice what each trustee, usually working with the sponsor, will decide is right for its scheme will vary.

Legal framework for choosing an end game

All trustees will execute their end game by exercising a power from the scheme’s trust deed and rules. Therefore any strategic target-setting should have regard to the relevant powers and how they may be exercised, which will depend on the scheme’s trust deed and rules. However, when exercising any power, trustees have to make sure that the use of that power meets the “proper purpose” test.

What is the “proper purpose” test?

The “proper purpose” test is that trustees have to make sure they use the relevant power in the way that it was intended. So for end game planning trustees need to ask themselves “what is the purpose of the scheme?” and, unless the trust deed has a different express purpose power, this can be broadly summarised as “providing the benefits the employer promised in a cost effective way”. This is a key consideration when looking at any end game.

What are the options for end game strategies?

In terms of end game strategies, there are various ways in which these can be achieved. To date the most common examples have been by either running the scheme on over the long term until all benefits are paid or by securing the scheme’s benefits with an insurer. However, as the pensions industry becomes more innovative, new options are emerging, as we are currently seeing with the introduction of the DB commercial consolidators. It is entirely appropriate for trustees to consider whether these may be appropriate, or at least warrant further consideration alongside the more traditional alternatives.

What do trustees need to take into account when deciding on an end game?

As part of exercising any power, there is the requirement, that all trustees will be familiar with, that when making any decision, trustees have to take into account all relevant factors and ignore all irrelevant factors. Whilst a trustee can be challenged for not considering all of the relevant factors, they cannot generally be criticised for the weight they decide to give to each factor. That is their decision to make in the context of their scheme’s and sponsoring employer’s circumstances.

There are a number of different factors to take into account as part of any end game planning which will, in part, depend on the scheme’s specific circumstances. One factor which will always need to be taken into account is the security of members’ benefits. However, it is not the only factor trustees will have to think about. This means that when considering options as part of end game planning, trustees are not legally obliged to choose the end game solely on the basis of which option would provide the maximum level of security for members’ benefits. The legal question is whether the end game provides a sufficient degree of certainty for members’ benefits rather than whether it is better than all of the other alternatives. At this point, the trustees then must consider and make a decision based on all of the relevant factors.

So, what should a trustee’s end game be?

In summary, there is no one size fits all. When considering any end game trustees should look at the different options available and weigh up what they consider to be the most appropriate at that time taking into account all of the relevant factors. Trustees will not be judged for any decision with the benefit of hindsight provided they have followed the proper process and acted reasonably at the time.

Sarah Parkin -Managing Associate