Posts Tagged ‘Buyout’

Ian Craig

It should come as little surprise that, given 2016 has been one of the most volatile in recent years, the amount of completed buyouts in the first half of 2016 is almost half that of 2015’s corresponding period.

The perceived fall in demand is, however, based on somewhat skewed figures as many insurers brought forward transactions to the tail end of 2015 ahead of the Solvency II requirements kicking in from January.  Solvency II is, of course, EU legislation aimed at harmonising the insurance regimes of its member states.  The trigger of Article 50 will be the trigger for those blogs… Read more »

Angela Burns

For many Trustees and employers, reaching the point where you can secure your pension liabilities with an insurer seems like an impossible task.

The Pensions Regulator publishes ‘Scheme Funding Statistics’ each year based on various ‘tranches’ of pension schemes. As at May 2015, the average buy-out funding level was 58% for schemes with a valuation date between September 2012 and September 2013.

For the majority of schemes , the path to buyout is not an easy one but it is important to understand that there are measures you can take to move towards this goal.

I have set out below our ‘five steps to buy-out’ Read more »

Christopher Shortt

I presented at the second ‘Future Influencer’ breakfast seminar hosted by Spence & Partners, on whether closed schemes should behave like schemes in the Pension Protection Fund (PPF) Assessment Period. Here is an overview of my presentation:

The PPF assessment period is triggered when a scheme’s sponsoring company goes insolvent.  Throughout this period, the Trustees of the scheme have to carry out a number of tasks (including data audits, equalisation reviews, benefit audits and rectifications etc.) to ensure that the scheme is up to standard for when or even if the scheme enters into the PPF. Read more »

Alan Collins

I came across an interesting panel discussion in the current issue of Engaged Investor Magazine, where a number of industry experts were asked for their views on developments in pension scheme de-risking. My views on the questions addressed are as follows:

Q1 – Many companies are not able to carry out full buyout in one go. What multi-layered approaches can they take to de-risk their schemes?

The most important first step is for the employer and trustees to agree a common goal for the scheme. In almost all cases (especially closed schemes), the ultimate goal should be to secure all benefits with an insurance company and wind-up the scheme.

An agreed, transparent objective will then set the path towards the ultimate goal. There are many alternative partial de-risking measures that can be taken, most of which can work in parallel. These include employer led exercises such as:

  • a transfer exercise, offering members the opportunity to transfer their scheme benefits to an alternative arrangement via an incentive in the form of an increased transfer value, or sometimes a cash payment; or
  • a pension increase swap exercise, where members give up future pension increases in return for a higher initial pension.

These exercises can generate significant savings to the employer relative to the ultimate cost of buyout. They are unlikely to generate significant immediate savings on ongoing funding costs or FRS 17, though they do contribute to reducing the risk profile of the scheme.

These exercises can be run in tandem with providing opportunities to members to retire early from the scheme, which can generate savings on cash commutation and also insurers prefer the “certainty” of pensioners rather than deferred members. In conjunction with the company, the trustees can also move towards a lower risk investment strategy, using bonds or LDI type investments, and also consider partial insurance such as pensioner buy-ins. I would caution that for schemes with young pensioners or where the pensioner group makes up a small proportion of the liabilities, it may not be efficient to use significant resources of the scheme to obtain insurance covering only a small portion of the liabilities. There are also opportunities developing in the market to enter into a staged buyout process with insurers, where the terms are agreed up front but the whole premium is not required at the outset.

Nor should the trustees overlook the potential for non-cash funding, such as parental guarantees, contingent assets or “asset-sharing” with the company, such as the whisky-bond deal completed by Diageo .

Q2 – In what ways did trustees’ de-risking choices change during 2010?

The choices remained broadly unchanged, though it was a year of massive change in defined benefit pensions, particularly on the legislative front. The single largest issue was Steve Webb’s RPI/CPI summer bombshell, which is expected to have a significant effect on pension scheme funding. Most schemes are expected to see a reduction in liabilities of between 5-15% depending on the nature of the scheme rules.

This meant that larger exercises tended to be shelved as trustees waited for the full impact of the change in inflation measure to come through. I would say the introduction of innovative non-cash funding solutions and the focus by trustees on obtaining enforceable security was the other main development in de-risking.

The emergence of longevity swaps was supposed to be the big-ticket item for 2010, but this remains the preserve on the very largest of schemes and I don’t see that changing any time soon.

Q3 – What early steps, such as data cleansing, communications and legal considerations, should be undertaken before entering into a de-risking activity?

The quality of pension scheme data can be highly variable. It can be held in multiple formats, for very long periods of time and is often subject to major change (e.g. after mergers, systems migrations, legislative changes). When entering a liability management exercise and moving ultimately towards winding-up a scheme, every effort must be made to ensure that members have the correct pension entitlement. The key message on data is that full and accurate data will reduce the cost of staff communication and liability management exercises as well as ultimately buying annuities as it helps to reduce underwriters’ pricing for uncertainty.

The communication process is also vital, both between the employer/trustees and the member. Possibly even more important is the communication between a financial advisor and the member during an employer’s de-risking exercise.

The need for proper legal input almost goes without saying, but the emergence of the RPI/CPI issue and continued problems with sex equalisation and other scheme amendments, mean that assistance from your friendly pensions lawyer is a necessity, not a luxury.

Page 1 of 11