Industry Voice: How to take just one bite at the buyout cherry

clock • 4 min read
Hannah Brinton, Aon
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Hannah Brinton, Aon

‘Failing to prepare is preparing to fail' is a very well-known and used adage, but what are the repercussions of poor preparation for pension scheme buyout?  

Most schemes that we advise which approach the market do proceed to transact, but we are aware of schemes that retreat from the broking process to reassess their preparation or wait for pricing which better aligns with their objectives. This, on the surface, may seem entirely reasonable. However, the reasons behind a scheme backing away from the process will live long in the insurers' memory and may result in insurer caution for any future market approaches. 

We all know of houses that sit on the market too long because they are overpriced or poorly presented. A sale may seem unlikely unless changes are made to either the asking price or the image presented to the market. In both cases, a strong steer from an experienced estate agent can avoid the negative image presented to potential buyers and enable the best deal to be struck at the first time of asking.

The same rings true in the risk settlement market. Having an adviser who fully understands the market and the best way to present schemes for transaction, will ensure a market approach is never premature and significantly increases the likelihood of transaction. Excellent preparation will speak for itself and maximise insurer engagement, but the ‘wow' factor can often come from insurers having confidence in the risk settlement adviser who is known to do their homework and only approaches the market when a scheme is likely to pass with flying colours.

While the ultimate failure in a journey to settlement may be a missed transaction, regrets may also take the form of decisions made in the wrong order. They may need to be unpicked later, or worse, they may be issues which are totally overlooked until they become critical. For this reason, it is paramount that decisions are made with the entire journey in mind to ensure the right decision is made the first time.  Being clear on your scheme's endgame objective and having an adviser who lives and breathes the entire process will ensure the most efficient route to settlement is achieved, both in terms of time spent and costs incurred. 

Careful planning in each of the following key areas will allow you to take one bite of the buyout cherry - and will most definitely make it all the sweeter:

Data projects

Between any buy-in and buyout, there is often a data cleansing period which ensures the data is as clean as possible. If other data projects are planned prior to transaction, the best route is to include any buyout considerations in these projects. Not only will this save time and money by only opening and correcting a members' benefit once, but undertaking a sufficient level of scrutiny is a prerequisite for any residual risk cover.

Benefit Specification

Closely linked to data, being clear early on your scheme's benefits vs. administration practice will help to iron out any discrepancies and ensure members are given the correct benefits. It will also identify any benefits that may be difficult to insure, allowing them to be tackled in advance. A common method for dealing with these benefits is via member option exercises, that also have the advantage of increased flexibility for members before these cease following a settlement transaction.

Portfolio Management

An experienced investment adviser well versed in insurer reserving methods can ensure your asset portfolio is aligned with insurer pricing. This is a strategy that will be beneficial no matter what stage you are at on your journey.  If you are invested in illiquid assets, careful planning in advance on how to divest these assets will ensure that you do not become a forced seller, or encounter delays as a result of being unable to divest your assets at the right time.

Phasing

Having your preparation in order can allow you to move quickly to capitalise on opportune pricing by securing either all of your liabilities or portions of the membership on a phased basis.  A phased approach can be beneficial in reducing exposure to future market pricing and stabilising your funding level along your journey.  An experienced risk settlement adviser can advise on the best end-to-end strategy to avoid leaving a residual membership profile which may be difficult to insure.

‘Preparation is key' is a phrase which may feel over-used in the risk settlement industry, but it cannot be over-stated and it will allow your adviser to cherry-pick the best opportunities for your scheme.

For further information about how to prepare your scheme for transaction, please speak to your usual Aon contact or email [email protected]

 

This post was funded by Aon

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