Karen Gainsford
The risk settlement market is experiencing unprecedented activity, with the number of transactions reaching record highs and a growing number of schemes accelerating their plans for the endgame.
Rising demand from trustees and sponsors, a competitive insurer market and favourable economic conditions have combined to create an attractive landscape for pension schemes considering a risk transfer transaction. In this environment, understanding the full lifecycle of a transaction, and the factors that can make or break it, has become critical to ensure that decisions can be made with confidence to secure the best possible outcome.
Assessing your options
The journey begins by developing a shared understanding of the scheme's ultimate objective – whether that is securing members' benefits or generating additional returns. This first stage is about aligning trustees and sponsors on the available routes, the timescales involved, and the implications of each choice, so that a preferred endgame can be agreed in a way that reflects both parties' priorities.
If insurance is the preferred endgame, the next step is to assess whether the scheme is ready from both operational and financial perspectives. This feasibility and readiness assessment includes reviewing the quality of member data, confirming the benefits payable to members, assessing the liquidity of the asset portfolio and considering affordability in light of current insurer pricing.
Insurer engagement
With the groundwork in place, your risk transfer adviser can then begin discussions with insurers. This stage involves preparing a complete and reliable data and benefits package, engaging with the market to understand appetite, and setting the parameters for a possible transaction.
The first formal step in transferring risk is the buy-in stage – where the scheme purchases an insurance policy covering a portion or all of its members. The premium is paid from the scheme assets and the insurer takes on the responsibility of paying benefits in line with the buy-in policy. After the buy-in, there is typically a further round of data cleansing to ensure all records match exactly with the scheme requirements. Any inconsistencies or missing information is addressed before moving to the final stage.
If the objective for the scheme is full risk removal, that final stage is to convert the buy-in into a buyout, where individual policies are issued to members. From buyout, scheme members interact directly with the insurer (rather than the scheme administrator) and the remaining empty scheme is usually wound-up, bringing it to its planned conclusion.
Barriers to achieving endgame
Even with a clear plan, transactions can be delayed or derailed by recurring issues. One of the most frequent is a lack of administrator bandwidth, where operational resource constraints prevent the scheme from bringing data up to insurance standards quickly enough. Another major barrier is the discovery of unexpected benefit issues, where discrepancies arise between what trustees and sponsors believe is promised and what is actually documented, creating unplanned rectification work.
Affordability can also present a challenge. Even when a scheme has a good estimate of insurer pricing, the insurer's own assessment of scheme-specific risk may lead to a different view of the cost. Illiquid assets can create further difficulty, particularly for schemes that had not expected to transact so soon and have invested heavily for the long term. In some cases, these assets cannot be liquidated quickly enough to meet premium payment deadlines, but alternative solutions are usually available.
Effective preparation
Strong preparation is the best defence against these challenges. Successful transactions tend to be built on collaboration, both between trustees and sponsors, and between the advisory teams who support them. When all parties work together and agree on objectives from the outset, they can make faster and more confident decisions later in the process.
Starting early is another hallmark of success. Schemes that begin preparatory work before they are financially ready to transact are able to address issues in a measured way, often alongside business-as-usual tasks, rather than under the intense pressure of a live deal. This early start means unexpected problems can be solved without jeopardising timelines.
A focussed approach across workstreams is also essential. Data cleansing, for example, should be planned so that each member's file is reviewed only once, with all relevant checks completed at the same time. This avoids duplication, minimises costs and ensures that the results are consistent across the scheme's records, benefits and assets.
Risk settlement is a complex and high-stakes journey, but with clarity of purpose, robust preparation and collaborative execution, schemes can move through each stage with confidence and achieve their chosen endgame in a smooth, well-managed way.
Karen Gainsford is a partner at Isio
