There have been a number of well-publicised large pension scheme transactions in recent years, but the number of these are more than matched with much smaller transactions from schemes of less than £100 million. We have seen a growing trend of schemes of all sizes setting buyout as their endgame target and planning their journey to settlement.
When preparing pension schemes for reaching their endgame, it is often difficult to know where to start and what to prioritise. While there are many common actions that need to take place across all schemes, it is important to focus on the actions that will have the biggest impact for your schemes.
Typically, the steps you should take, and the timing of taking of those steps depends on your scheme's size. Below, we look at the key stages of a scheme's de-risking journey, and how these differ depending on scheme size.
Data and benefits
It is essential to have a good understanding of data quality and the scheme's benefits to avoid any nasty surprises in future. Every scheme must ensure it is comfortable with the data and benefits, but the timings for this depend on the size of the scheme.
At the smaller end of the market, the focus needs to be on getting the data and benefits right in advance in order to achieve maximum engagement from insurers, completing any known data cleansing actions and, ideally, equalising GMPs. In a busy market, insurers are more likely to prioritise the smaller schemes that have already completed thorough data and benefit preparation work.
For larger schemes, there tends to be more scope to address data cleansing actions after the transaction. As a result, to provide greater certainty and avoid any nasty surprises, any data and benefit preparation work should focus on addressing the most material items.
The typical investment portfolio depends on the size of a typical scheme. Portfolios tend to be more complex for larger schemes, often including some illiquid holdings, such as property, which are expected to run off over several years. Often these illiquid holdings cannot be passed to insurers and so either the transaction would need to be delayed while the assets run off, or they would need to be sold at a discount.
For smaller schemes the portfolios tend to be simpler and may not need as much preparation work ahead of buyout. The focus should be on whether the portfolio holds assets that can be transferred to insurers, such as gilts and corporate bonds.
No matter what the scheme size, it is sensible to review the scheme's investment strategy early and to have a long-term plan in place which looks towards the scheme's ultimate endgame and ensures the investments do not provide a hurdle.
Market approach strategy
Schemes of all sizes can access competitive pricing and commercial terms but the keys to unlocking these vary by scheme. It is therefore important that a market approach is designed to reflect the specific nuances of your scheme to get the best possible outcome for the scheme and its members. These keys include the following:
For smaller schemes:
- Communicating the extensive preparation carried out by the scheme to maximise its attractiveness to insurers
- Using a broking process that has been specifically designed to provide smaller schemes access to better pricing and terms, e.g., Aon's Pathway service
- Partnering with insurers on an exclusive basis get focused engagement
- Where there are multiple schemes with the same principal employer, either bring multiple schemes to market together to create a larger transaction or highlight the other schemes to insurers to take advantage of the lure of further business to come in the future.
For larger schemes:
- Engage with insurers early and frequently, having conversations with the likely participants well ahead of approaching the market to best position the scheme in the market
- Ensure you have well-defined timescales to allow insurers to line up appropriate resource at the right time
- Put the emphasis on strong project management to minimise slippage against timescales.
Preparation ahead of reaching your endgame target is essential, but you should prioritise the steps that have the biggest impact. These depend on the specifics of your scheme, so involving a risk settlement specialist early in the process is valuable in ensuring you focus on the key areas and to develop the best possible strategy to achieve your goal.
For a FREE personalised report that benchmarks your scheme's progress on its journey to settlement, together with some suggested next steps to keep you on the right path, please complete our short online survey.
For more information, get in touch with your usual Aon contact or email us at [email protected].
This post is funded by Aon