Background
This is a long-standing DB client of Quantum Advisory, which has had a long-term aim of buying-out members benefits with an insurer and ultimately winding up the pension scheme. Over the last several years, we had worked closely with the Trustees to improve and protect the funding level of the scheme, whilst waiting for the opportune market environment to secure members benefits.
Having considered a range of low risk buy-out focused investment strategies for the client, we implemented the most suitable portfolio using a range of levered and unlevered gilts, corporate bonds, and cash for liquidity and to meet cash flow. We then set up an automatic rebalancing agreement with the investment manager, to ensure the scheme’s assets were regularly balanced back to the strategic asset allocation; and within matching assets, that the hedge ratios are monitored and automatically rebalanced back to the target hedge ratio.
By early 2022, the scheme’s funding level had improved significantly and we noted the scheme would be able to buy-out the liabilities without any further contribution from the sponsor. The trustees were therefore able to proceed with searching for a suitable insurance provider to secure the members benefits.
The initial aim was to remove the investment, inflation and mortality risks associated with the scheme through a buy-in policy. The secondary aim of winding up the scheme could then be achieved by converting the buy-in to a buy-out policy.
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 buy-in and buy-out 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 buy-in/buy-out, 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 the project.
There are two elements to the scheme’s data. Firstly, it is important that all data held on the administration systems is accurate and reliable and, with our regular monitoring and data quality assessments, this step could easily be achieved for the scheme. Secondly, insurers require additional information of the scheme’s membership and our data assessments can readily be adapted for these requirements.
Approaching the market
Once the data and scheme documentation are in good order, we can approach the market with a request for detailed quotations.
- Asset Transition phase 1: The “price lock” portfolio
Each insurer has its own pricing methodology and will advise on their “price lock” portfolio, which effectively tracks the movements in the premium before assets are transferred across to the new buy-in policy.We worked closely with the insurer and the scheme’s investment manager to implement the price lock portfolio smoothly, efficiently, and crucially in a timely manner.The manager at the time, had a range of single-stock bond funds that invest solely in each of the bonds specified by the insurer. These funds had reasonable liquidity, which was an important consideration in the run up to execution of the buy-in policy. Furthermore, the asset management fees on these funds were competitive, and the costs of trading the funds were expected to be low.We therefore recommended that the trustees transition the Scheme’s assets into these bond funds. - Asset Transition phase 2: Transfer to insurer
Some insurers will accept an “in specie” transfer for some or all of the portfolio, which can help to manage transition risk (and costs). In this instance it was not possible to facilitate this with the manager and insurer, so we organised a cash transfer, where managing out of market risk was critical. When the premium was due to be paid, we arranged for the bond portfolio to be sold down, and the proceeds paid into the Scheme’s bank account, before subsequently transferring to the insurer on the same day to minimise out of market risk.
Finalising the buyout
With the initial buy-in phase complete, the scheme had transferred all of its investment and mortality risk to the insurer with the attractive premium leading to a small surplus remaining in the scheme, which was used to meet adviser fees in the first instance. Over the next few months, we worked closely with the insurer to validate the scheme data and ultimately handover the ongoing administration and payroll for the scheme.
Once everything was in order, the buy-in policy was converted to a buy-out 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 formally wound up.