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Quantum has wind in sails for scheme buyout

When Panasonic System Networks U.K. Ltd, a major electronics manufacturer in South Wales approached us to wind up its pension scheme, we rose to the challenge and delivered against all the odds within a 12-month period.

Established in 1988 and, in its heyday, employing over 600 people, the company and pension scheme could be considered relatively new. As a result of a gradual decline in the number of active members, the trustees and company started a gradual de-risking programme. Their aim was to promote the security of accrued benefits.

Following the decision to completely close its site in 2013, the company decided to place the UK company in Members’ Voluntary Liquidation. They approached us to develop a proposal where the scheme’s liabilities could be bought out in full within a year as their aim was to liquidate the company soon after and wind up the scheme.

Following a competitive broking exercise, we short-listed two insurers. Following presentations from both and a thorough appraisal of price, industry track-record, quality of administration, stability of premium and general appetite – we selected a preferred provider.

We were able to agree a mechanism with the insurer where we could monitor the amount of the balancing premium on a daily basis by reference to movements in published market indices. This avoided any nasty surprises when the time came to make the final payment.

We achieved our primary objective of securing the liabilities and removing the risk from the employer’s balance sheet well ahead of the deadline.

That said, achieving the client’s objectives and securing a full buy-out within a 12-month period presented many challenges, which we overcame in the following ways.

  • Challenge: The company would continue employing staff and a number of employees would continue accruing benefits before transferring to a sister company.
  • Challenge: A full data cleanse exercise was needed, including self-verification letters for all members.
  • Challenge: As the scheme was contracted-out of the State Second Pension we needed to reconcile Guaranteed Minimum Pension (GMP) data against that held by HMRC.
  • Challenge: The need to equalise the calculation of GMPs for males and females. This is an area of significant legislative uncertainty in terms of whether it is actually necessary and how it can be achieved.
  • Challenge: Scheme rules provided for a money purchase underpin: the benefits payable to members had to be at least equivalent to a notional pot, based on contributions paid by the member and company.

Solution: We calculated and confirmed benefits in advance of the end of tax year by awarding additional service credits to affected members. This allowed the scheme to close to future accrual and surrender its contracting-out certificate.

Solution: The buy-out has been preceded by an enhanced transfer value exercise in 2012, which meant that a lot of data had already been cleansed, including address tracing and existence-checking. The trustees had also monitored the scheme’s data in accordance with the Pensions Regulator’s record-keeping guidance leading up to closure.

The initial data that was issued to the insurers was highly accurate, which meant they were happy to produce an initial guaranteed quotation to tight timescales (six weeks from the provision of data).

Solution: This was our single biggest hurdle in discharging liabilities in full by deadline, due to the back-and-forth nature of resolving discrepancies with HMRC. This risked jeopardising the entire process. Our solution was to request that the prospective insurers fully secure the scheme’s benefits on the basis of unreconciled GMPs so that any changes arising from the GMP reconciliation process (to be completed after wind-up) would not impact on the premium paid.

Solution: We proposed a value-based approach for the equalisation that was actuarially “fair” and pragmatic. This was the approved by the scheme’s legal adviser.

Solution: We recognised the importance of these scheme rules in ensuring that liabilities would be fully discharged. We reassured the trustees that the underpin could fall away without impacting members’ benefits. Thanks to a combination of robust and pragmatic actuarial advice (including scenario testing calculations) and legal advice, we were able to confirm that the buy-out could proceed unhindered.

We carried out the remaining wind-up tasks – including the preparation of audited accounts, member communications, securing of Additional Voluntary Contributions policies, notifications to the statutory authorities and GMP reconciliation – soon after, having completed a challenging wind-up in record time.

 

Aled Edwards - Principal Consultant & Actuary
T: 02920 837909