From the blog: Much like the former pensions minister, I too like shiny sports cars. If they have an enormous spoiler, personalised number plate and an attractive price tag, then so much the better.
But, as anyone who has bought a car will know, a new vehicle is only as good as what lies beneath the glossy exterior.
I know this from the experience of a colleague (whom I won’t name, although it is tempting) who suffered the ignominy of having to pull his flashy sports car over because it had run out of petrol – the fuel gauge wasn’t working.
But, as anyone who has bought a car will know, a new vehicle is only as good as what lies beneath the glossy exterior.
I know this from the experience of a colleague (whom I won’t name, although it is tempting) who suffered the ignominy of having to pull his flashy sports car over because it had run out of petrol – the fuel gauge wasn’t working.
And, yes, the same is true of bulk annuity insurance buy-in and buyout policies.
The headline price and headline terms can look good, but before selecting a policy or negotiating on price, trustees would be well advised to look under the bonnet to check what lies beneath.
Otherwise they could find themselves selecting a policy that exposes them to unexpected costs and inappropriate risks.
Features to check
The sorts of 'mechanical features' trustees should pay attention to before selecting a policy include:
The ability for the insurer to reprice or take more drastic action, such as terminating the policy, if the price moves or there is a change in the characteristics or duration of a scheme’s liabilities as a result of data cleansing.
There being no guarantee that payments under a buy-in policy can be reshaped to reflect Pension Protection Fund compensation limits should the scheme enter the PPF in the future – I am aware of at least one set of trustees who have walked away from a policy because they were not comfortable on this point.
The trustees’ liability not being limited to the assets of the scheme.
A term in a medically underwritten policy that requires trustees to take on liability for the accuracy of the medical information supplied, even though they have no control over that information.
Trustees should also remember that, unlike buying a car, purchasing a bulk annuity policy for a buy-in or a buyout is an exercise of their fiduciary duties – you can be more reckless with your own money than when you’re looking after someone else’s.
In addition, it’s irreversible (the decision I mean, not the car): at the very least surrender values make it difficult to come out of a bulk annuity policy.
So trustees always need to check under the bonnet before selecting a policy or negotiating on the price, and they should be sure to have an expert with them to conduct a thorough vehicle inspection.
Hugh Gittins is head of pensions insurance at law firm Eversheds
