Aviva explains the five crucial ingredients needed to conduct a successful bulk annuity transaction.
We're often asked, what are the key ingredients to a successful BPA transaction?
The answer is preparation, preparation, preparation! That said, even the best ingredients won't turn you into Mary Berry if you don't know how long to bake the cake.
In our experience timing is the number one reason why transactions don't occur. So bringing the ingredients together efficiently and at the right time is important. Otherwise you risk getting your fingers burnt.
The bulk annuity market has developed significantly over the past few years. Efficient transactions now take less than three months to get to a position to transact, giving all parties the best chance to benefit from favourable financial conditions.
Of course, to do this, everything has to be prepared properly. This means putting all the essential ingredients into the mixing bowl. There are five stages to this process - and it's best to make sure they're all underway at the same time:
1 Take a healthy dash of data
It's crucial to ensure the scheme data is in good shape and is well understood. You need to be clear on the liabilities you want to remove before you can make an overall assessment of value. We've touched on the importance of having quality data in a previous article, which you'll find here.
2 Mix in a legal review
A legal review of the benefits the scheme should be paying goes hand in hand with the data. All too often, this is left until late in the process - running the risk of delaying a transaction.
3 Don't forget the stakeholders
It sounds simple, but stakeholders aren't always involved when they should be. An all-party meeting at the outset to include trustees, sponsor, advisers and sometimes even insurers (after all we are here to help!) allows time to resolve any issues and, importantly, agree on a common objective.
4 Check that the mixture's right
Insurer strength, experience, brand and levels of member care differ between insurers. To bring clarity, set an objective view on the importance of these areas before you're immersed in an imminent transaction.
Of course price is always at or near the top of the list, so a pre-assessment of what value you put on risk removal is vital. Whether this is linked to the scheme's technical provisions, assets or another measure, make sure you have a clear trigger for transaction.
5 Get ready to serve up your assets
To set a price trigger you need to know how you'll pay the premium. This not only affects the liabilities to be covered under the policy, but also any residual assets and liabilities left in the scheme. Asset transition is vital.
Some questions specific to the purchase:
How can the insurer ensure your value call remains relevant? Can they link the bulk annuity premium to changes in your trigger?
What are the dealing dates for your assets and will the asset manager allow an in-specie transfer?
Will the insurer take your assets in-specie and, if so, what saving will they pass on to you?
Will you be exposed to ‘out-of-market' asset movements or can the insurer mitigate this risk?
How does the sponsor receive certainty on the amount of top-up required?
Timed to perfection
To have timing on your side, it's important to run all actions in parallel. This applies equally to any other actions you may take, including the collection of ‘non-traditional' data such as individual medical information.
One of the criticisms of the underwritten market is the additional time it takes to collect information. To cut this, the process should run in parallel with the other areas discussed. Otherwise you run the risk of collecting incomplete information, or market movements could cancel out any potential benefit you get from underwriting.
If you're wondering if medical underwriting is right for your scheme, see our previous article.
The proof of the pudding
The benefits of a correctly timed transaction are already driving developments in the bulk annuity market. Advisers are starting to roll out tools to track insurer prices against trustee trigger points. Over time this will likely result in a ‘shop window' approach where trustees or insurers can decide when the timing is right to transact.
This may be when insurer prices and trustee triggers naturally overlap, or where an outside influence presents an opportunity - possibly when insurers require premium income to fund an asset opportunity, or where trustees / sponsors agree extraordinary funding or a revision to triggers.
Either way, this should lead to an enviable situation... the chance to have your cake and eat it.