The Client: Large transportation and logistics business
Introduction
Small scheme buyouts can be challenging as the number of insurers willing to quote at that end of the market is often limited meaning that pricing may not always be as competitive as for larger schemes. In this article we examine a case study for one such small scheme.
Background
A long-standing client of Quantum Advisory has a number of pension schemes that we advise. As well as ongoing Defined Benefit (DB) and Defined Contribution (DC) arrangements, there was an old legacy Executive DB scheme that had been closed to active members for many years.
We had worked closely with the Trustees on their funding and investment strategy to improve the funding level of the scheme with the long term aim of buying out the members’ benefits with an insurer and ultimately winding up the pension scheme.
By 2019, the funding level had improved sufficiently that we determined the scheme would now be able to afford a buyout without a contribution from the sponsor and therefore advised the client that a buyout project could commence. The scheme had assets of around £25m and 50 members with bespoke benefits for a number of members due to the historic development of the scheme’s benefit structure.
The initial aim was to remove the investment, inflation and mortality risks associated with the scheme; this would be achieved through a buy-in. The secondary aim of winding up the scheme could then be achieved by converting the buy-in to a buyout.
Preparation work
The first stage of the project was to provide the Trustees with suitable training to ensure that they were comfortable with what a buyout entailed and the process that the scheme would need to go through. We then produced an indicative project plan and worked closely with the scheme’s legal advisers to set out of the steps that would be completed.
As with any buyout, the initial steps focus on the scheme’s data and the governing documentation – it is key to identify any potential issues as soon as possible in a buyout project and these are two areas where challenges can often arise. This is particularly important for smaller schemes, which can be viewed as less attractive than larger schemes by the insurers in the market. There are two elements to the scheme’s data.
- Firstly, it was important that all data held on the administration systems is accurate and reliable and, with regular monitoring and data quality assessments, this step could easily be achieved for the scheme.
- Secondly, insurers require more data than a third-party administrator would typically hold. For this scheme, information on members’ spouses and dependents was not previously held; a communication exercise with the members to obtain any missing data was conducted.
Approaching the market
Once the data and scheme documentation were in good order, we approached the market with a request for quotations. For smaller schemes such as this one, there are typically fewer insurers who are interested in quoting, however the preparation work completed by Quantum Advisory for the scheme ensured that it was attractive to insurers – i.e. there were no hidden surprises and a transaction was achievable relatively quickly.
In the end, we were able to obtain very competitive quotes from two leading providers with the final premium resulting in a saving of approximately 10% from the initial buyout cost estimate. With an excellent price achieved, we worked swiftly with the Trustees and their other advisers to complete the buy-in transaction by Q1 2020.
Finalising the buyout
With the initial buy-in phase complete, the scheme had transferred all of its risks to the insurer with the attractive premium leading to a small surplus remaining in the scheme. Over the next few months, we worked closely with the insurer to validate the scheme data and ultimately handover the ongoing administration and payroll of the scheme. At the same time, we worked with the Trustees and sponsor to refund the remaining surplus assets to the employer.
Once everything was in order, the buy-in policy was converted to a buyout and the members of the scheme issued with individual policies from the insurer. All the liabilities of the scheme had now been discharged and the scheme could then be wound up.
The project had now been completed on time, within budget and with a positive outcome for all parties involved.
Conclusion
For any scheme looking to buyout in the near future, and particularly for smaller schemes, the main takeaway for trustees is that preparation is key. By ensuring that scheme data is accurate, governing documentation is up to date and there are no nasty hidden surprises, small schemes can achieve a successful buyout.