2019 was a record year for pension scheme buyouts – the year of the ‘mega-deal’ by any measure. Despite being hit by the COVID-19 pandemic, the industry is still expecting 2020 to be one of the biggest years, by volume, for buyout transactions.
Small schemes have historically struggled to access the buyout market. But with fewer ‘mega-deals’ expected, could 2020 be the year of opportunity for small schemes?
Here are our top tips for how a small scheme can position themselves to take advantage of opportunity in the market:
- Be well prepared to secure insurer engagement
Insurers will want to see that small schemes have a well-developed endgame plan and have a commitment from the sponsor to meet the capital requirement. Well prepared schemes will get priority and insurers will only be interested in schemes that can follow an efficient process to endgame.
- Appoint a dedicated project management resource
Planning and keeping activities moving in line with the plan is key. A dedicated project management resource should manage conflicting priorities across various advisors acting for the Trustees, Sponsor and Insurer. In a buy-out there will be multiple dependencies, based largely on meeting the agreed pricing triggers. A buy out project manager needs to be across all the moving parts and be able to mobilise the resources as triggers are met.
- Get your data in good shape
Carrying out address tracing, existence exercises, validation of spouse or dependant details can quickly and easily plug data gaps and show insurers that you are serious. Insurers will be picky about the schemes they price. Having made inroads to cleanse data before approaching the market will make you a more attractive scheme and positively influence your pricing experience. Even if in the early stages of preparing your endgame plan you can begin work on filling those data gaps now!
- Understand your assets
It will come as no surprise that schemes need to be well progressed with asset de-risking. However, also be aware of legacy asset issues. Where liabilities are backed by old annuity policies make sure you understand what those annuity policies cover and how easily they can be novated.
- Benefits Specification – not always as simple as it may seem
As with data, work on the benefits specification can begin early on in your journey towards endgame. Your benefits specification will need sign off by your legal adviser. Also think about any discretions that exist in your Scheme Rules. Insurers cannot insure discretions, so discretions will need to be removed or hard-coded. Understand whether Trustees have typically granted discretions or not when deciding whether to hard-code or remove discretions to avoid any post buy-out shock. Keep your administrators informed of any discretions that are being removed during the transition to buy-out. They are the ones who are speaking to your members about the scheme benefits and need to know if benefits are changing.
Small schemes have the advantage of being well positioned to move more quickly than larger schemes. Particularly with data cleanse, benefits specification, and asset management. If you can present to an insurer that you are well advanced in these areas and have support from your sponsor towards endgame you could be well positioned to pick up some attractive buy out pricing this year.
If you are interested in discussing the buy out market and how GO could help you plan for the endgame, get in touch.