CNPP micro section well poised for scheme buyout

Trustees are aiming to transfer the section, one of the smallest in the pension scheme, to an insurer “within the year”, although no insurer has yet been named as a destination for their 13 members.

Thirty-seven per cent of defined benefit schemes are aiming for an insurer buyout, or a similar level of funding, as their long-term strategy, according to Willis Towers Watson research.

Impressive year for pension scheme buyouts

A record £7.8bn of buyouts and buy-ins were completed by UK pension schemes in the first half of 2018 – up from £5.1bn in H1 2017, analysis by consultancy LCP revealed in August.

More recently, in September the Airways Pension Scheme £4.4bn buy-in with Legal & General took total buy-in buyout volumes announced to date in 2018 to a record level at £13.7bn.

An August pensions bulletin on the CNPP website stated: “Over the last 12 months, the trustee and EnergySolutions LLC have been working together to secure the liabilities of the section with an insurer.”

It continued: “This process is ongoing and the trustee expects the section to be wound up within the year.”

All affected members will receive their full level of benefits and will be communicated with once the process is complete, the bulletin added.

WS Atkins, member of the SNC-Lavalin Group, acquired the Projects, Products and Technology nuclear services division of EnergySolutions in 2016. The buyout decision was agreed as part of the sale.

Employer sets up escrow account

The scheme section’s 2016 actuarial valuation report, put together by Deloitte, highlighted EnergySolutions’ agreement to finance a buyout of the section as a condition of the sale.

The report stated that the former parent company of the employer, EnergySolutions, provided a guarantee to the section and agreed to buy out its liabilities so that WS Atkins would not incur any related costs.

“To facilitate the buyout, EnergySolutions LLC placed $7.7m into a escrow account. Another $16m was placed into a separate escrow account to cover the obligations of the seller, including any amount in excess of the $7.7m to buyout the section’s liabilities,” the document explains.

“It is intended that the buyout will progress once three of the six deferred members at the valuation date have reached their normal retirement age,” trustees continued.

In light of its intention to wind up the section, the trustee board has now adopted a technical provisions basis similar to that used by an insurer to price annuities for all members, the report highlighted.

The section’s recovery plan requires employer contributions of £2m, payable annually for five years from July 1 2017.

It is currently invested in a low-risk strategy. According to the bulletin, the section is 100 per cent invested in UK government and corporate bonds, and the investment return for the section has been 20.2 per cent over the two-year period to March 31 2018.

Small schemes should take steps to stand out

As one of the smallest buyout propositions to come to market during a busy time for insurers, experts said the EnergySolutions section may struggle to attract the interest that greets larger schemes. It had £31.4m assets and £40.3m in liabilities as at March 31 2018, and has no active members.

Marian Elliott, managing director of integrated actuarial at Redington, said: “Completing a buyout for a small scheme is easier in terms of cleansing data, obtaining more detailed information about members and checking that the benefits have been calculated in line with the scheme rules.”

There are downsides, however, to lacking scale. Elliott noted that it can be more difficult for small schemes to obtain competitive quotes. “There may be lower appetite among insurers to secure small schemes, given the cost of pricing and negotiating the contract,” she said.

LCP partner Charlie Finch said the danger for schemes approaching the market is that they will not be able to get quotes or good pricing from insurance companies, “and that’s particularly so for the smaller schemes who will get increasingly crowded out from the market”, he said.

However, there are steps schemes can take to improve their visibility to insurers. “It’s all about standing out if you’re a small scheme,” said Finch. “There are insurers who are very happy to quote on small schemes, but they’re not going to quote on all of them.”

He advised trustees to put themselves in the mind of the insurer, who will ask questions like: “Is this is a transaction which is going to complete, and how much work will it be to do?”

They will consider whether the scheme has good governance, whether all stakeholders are on board, and how certain it is that funding is available, Finch said.

The GPS EnergySolutions section looks well placed on this front, with its s75 guarantee and commitment to buyout, which is written into the actuarial valuation report.

“If I [were] an insurer, I’d take a lot of comfort from that,” Finch said.

Transactions can prove to be expensive

Unsurprisingly, cost can also be problematic for smaller pension funds when it comes to buyout.

Alan Pickering, chair of professional trustee company Bestrustees, noted that, “as with a number of transactions, there are some fixed costs, and those fixed costs have a disproportionate effect on small schemes”.

He said some intermediaries have put together packaged arrangements “that might not be cutting edge in terms of value for money, but at least will make such transactions affordable for those small schemes”.

For some of these pension funds, opting for an “off-the-shelf transaction package is probably more sensible than having someone put together a bespoke package, thereby incurring the costs of starting with a blank sheet of paper”, Pickering said.

Daniel Taylor, director at third-party administrator Trafalgar House, said many trustees are surprised when their administrator asks them to revisit their data management plans upon approaching the buyout market.

“The existing practices around data management are more really about what you need for ongoing administration, not necessarily what you need to transact a policy that will move all your liabilities to another provider,” he said.

When it comes to buyout, “suddenly the benchmark goes up both in terms of the data items that you look at, but also the approach to data management”, Taylor noted.

This means the costs for achieving buyout-ready data “can be very significant”, he said.

Deal with data in advance

Even if a scheme is not imminently looking to buyout, there are things trustees can do to help themselves to be ready for when they do get closer to transacting.

Gavin Markham, partner and head of bulk annuity consulting at Barnett Waddingham said “carrying out data due diligence at an earlier stage” is important to ensuring a smooth ride.

To avoid any unpleasant surprises during the transaction process, Markham recommended going beyond day-to-day administration by including additional information, such as spouses’ information – which could help improve pricing when it is shared with insurers.

Trustees also need to make sure the benefits to be secured are calculated correctly, he added.

Elliott agreed, saying schemes need to “check that the benefits set out in the scheme rules correspond to what is actually being put into payment for members, and the scheme data”.

“This is so important and can’t be done too soon, no matter what stage of the journey the pension scheme is in. Without clarity over the benefit structure and confidence that the data held reflects this accurately, any buyout process will be very difficult,” she added.

Insurer look for willingness to transact

Trustees should also think about the assets they hold and how easily these can be transferred to a buyout provider, noted Elliott, adding that “there may be a need to revisit the asset strategy in the run up to buyout”.

Pickering said it is helpful if the insurer knows that both the employer and the trustee are keen on transacting.

With a queue of potential customers, insurers may have only limited resources to complete transactions.

“If they know that the employer and trustee are both really, really keen on transacting, subject to price, the insurer is much more likely to funnel those scarce resources in your direction than in the direction of somebody who is faffing around and doesn’t really know whether they want to move or stay put,” he said.