Jane Kola looks at what pension funds can they do to improve their chances of concluding a successful deal on good terms
For years commentators have predicted that the bulk annuity market would face a capacity crunch as schemes raced to buyout. It seems that capacity crunch may have arrived.
2018 saw the largest transfer of liabilities from schemes to insurers, with predictions of circa £18bn to £20bn and the largest deal ever of £4.4bn. Larger schemes are doing multiple deals, some with multiple insurers. More schemes and employers are finally seeing rising funding, making buyout seem in reach.
As the number of schemes in the market for a buyout deal rises and schemes compete with large back-book annuity deals from insurers that have left the market, is there still space for everyone in the buyout market or are some schemes and employers destined to be disappointed?
A few years ago insurers were willing to work hard with a limited number of schemes to secure deals. They would take the risk that scheme due diligence would uncover issues that might torpedo the deal. With capacity stretched, insurer willingness to put in such ‘hard yards' to do a deal has waned in favour of schemes ready to trade easily and quickly.
For schemes and employers alike looking at the prospect of funding levels to support a buyout in the next three to five years, what can be done to improve their chances of concluding a successful deal on good terms? The most important step for getting a scheme buyout ready is sorting out the data to better understand the liability profile. Buyout ready data needs to be much more ordered than the data most schemes hold - it is worth the pain to clean it up properly.
Here are our other top five tips on being buyout ready:
- Check you are paying the membership their legal entitlements. Too many schemes assume the administration systems correctly reflect the benefits due under the rules or if not that the differences are not big enough to be worth checking. Errors in some benefits like pension increases, revaluation and retirement rights can move the liability dial materially.
- Check your benefits are actually insurable. Some benefits are a complete 'no-no', like underpins. Others are disproportionately expensive like fixed factors. Given time most schemes can do something about such benefits, which creates value for the members and makes the scheme more attractive to insurers.
- Be better informed about legal risks and uncertainty in benefit rules. Trustees are often comfortable taking risk on their employer covenant and in their investments. The minute that legal risk arises, they want to eliminate it. Legal risk is no different to financial and investment risk. It should be understood, valued and where possible mitigated. On legal risk, insurers look for clarity not cast iron certainty.
- Consider if your advisers have what it takes to advise you on the final leg of the journey to buyout. While almost all pensions advisers will have some experience of buyout projects, it is often spread thinly across a few people who have done the occasional deal. Those with a genuinely good and current understanding of what it really takes to succeed to buyout are not commonplace. Test your existing advisers' credentials to make sure they measure up.
- Learn about the bulk annuity market and get to know some of the insurers. Sign up for insurer briefings and take an interest in what those organisations offer. Being a familiar name on a potential deals list may help in getting a competitive quote.
Preparation with the right team is key to yield results, and while the trustees are at the forefront of such work, employers can do much to help trustees to get buyout ready by encouraging sensible expenditure to tidy up scheme liabilities.
Employers should also note that as schemes approach their buyout goal, the risk of trapped surplus increases and is an issue that some employers already face. Who gets the surplus depends on what the rules say - not how much money the employer has paid in. If employers want surplus back, they should see if the rules can be amended now to permit this and not wait for buyout. Employers and trustees alike should carefully manage premium and contribution payments to minimise the surplus risk while not starving the scheme of necessary funds.
Jane Kola is partner at ARC Pensions Law
Aviva Life & Pensions has concluded an £875m buy-in with its own staff pension scheme, following on from a similar transaction last year.
Just Group has completed a £74m pensioner buy-in with the UK pension scheme of a US-listed engineering business.
The Smiths Industries Pension Scheme has secured a £146m buy-in with Canada Life in its fourth bulk annuity and its sponsor’s tenth overall.
The Prudential Staff Pension Scheme has entered into a £3.7bn longevity swap with Pacific Life Re, insuring the longevity risk of over 20,000 pensioners.
The Baker Hughes (UK) Pension Plan has secured approximately £100m of liabilities through a buy-in with Just Group.