Is your data a barrier to buyout?

Girish Menezes looks at how trustees can start preparing their data for a buyout

clock • 3 min read
Girish Menezes: The data quality burden has never been higher
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Girish Menezes: The data quality burden has never been higher

Interest rate changes have made buyout a realistic possibility for many schemes. Sponsors are sensing an opportunity to exit their defined benefit (DB) scheme liabilities and remove the unpredictable impact they have on their balance sheets.

However, trustees and sponsors are aware of the significant barriers that exist when it comes to buyout. Insurers are not quoting for schemes with poor-quality data and are not buyout ready. As interest rates are volatile and could drop right down again, this can take an early buyout off the table for some. Worryingly, trustees and sponsors have a finite timeline - usually 12 to 24 months from a buyout price being agreed - before the insurance company can revisit the pricing.

The data quality burden has never been higher and sponsors who are close to buyout often believe that administrators won't be interested in working alongside them, but this is not the case. The journey to buyout is a welcome challenge to many specialists, even with the short timeframe.

Trustees with a longer runway should start the process in any event. Regardless of endgame, getting a scheme buyout ready will deliver vast improvements in quality of member experience, automation, self-service and analytics in the interim. The additional benefit is being able to turn around a transaction at short notice, based on sponsor appetite and market conditions.

Where do we start?

There are key steps to be taken to understand your starting line when working towards buyout and what you will need from your administrator. 

  • An up-to-date benefit specification that has been reviewed by your actuary, administrator and lawyer.
  • A comprehensive buyout data audit. This is far more stringent than a standard common and scheme-specific data audit.
  • A benefit audit, or else you may risk errors surfacing as part of the post-buyout true-up.

Look for experience in the journey

Any journey requires adequate preparation. Pricing is dependent on your administrator being able to communicate a detailed understanding of your rules and underlying data to relevant insurers. 

Getting the benefit specification and data right is a complex process and not all administration providers are equal in terms of quality, cost or speed. Having a thorough understanding of how each process and supplier links in with one another comes with years of experience, which is invaluable in the current environment. Meanwhile, technology allows the leverage of standardised solutions, commercial databases, digital communication and bulk processing.  

Finding the right partner

The minimum timescale for an efficient buyout is likely to be two to five years, depending on size of scheme and complexity. However, we have all seen buyouts dragging on for multiples of this due to having the wrong administrator in place.

This has been exacerbated by the global resourcing bottlenecks impacting the UK pensions administration industry. Complex endgame work cannot be easily contracted or outsourced, given that the pool of experienced pension specialists is limited. 

This can be avoided by working with a specialist buyout administrator who will act as an efficient and cost-effective partner. You may end up paying less to a specialist administrator, while gaining a higher quality of service. 

Become buyout ready by default

Good administrators are embedding buyout readiness into their business-as-usual processes. It is baked into every member call, their forms and online member experience. This needs to be built on a clear view of the requirements of buyout and data required. This focus helps day-to-day transaction speed, accuracy, self-service, and ad hoc de-risking as well.

The business case

Trustees and sponsors are aware of the importance of administration in general and data in particular. This is being built on through solutions like the dashboard, GMP equalisation and, of course, end-game preparation - all of which benefit scheme members who can then access comprehensive self-serve functionality. Administrators can then focus on the members themselves and value-added services, rather than manual calculations. Sponsors are finding these investments invaluable in helping them de-risk their balance sheets efficiently when the time is right and ensuring there are not any barriers to buyout.

Girish Menezes is head of administration at Isio

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