How to get value on your derisking deal

Marian Elliott: Get your data and your liability information right. When you are providing information to insurers make sure it is up to date and there is as little uncertainty around it as possible. You do not want to be doing valuations based on out-of-date data; you want your assumptions to be broadly in line with what your insurers are using, you want your benefit structure to be really clear. The benefit basis is absolutely key, that you are clear with what it is you are insuring, because otherwise it is very difficult for the insurers to price it keenly, when there are uncertainties in what they are going to have to pay out.

Julie Stothard: Equalisation, generally, is a big issue there. We talk about guaranteed minimum pension equalisation, but that pales into insignificance compared with potential equalisation issues for some schemes. These problems often come to light when you start to go through the data-cleaning process. As Marian was saying, when you start to look at the documentation, you might find the Barber window was not closed when you thought.

Myles Pink: What do you think about pension schemes preparing to purchase a bulk annuity by going as far as altering their asset allocation ahead of any transaction? They could either align the assets to the insurer’s investment approach to track the bulk annuity premium, or deliberately not align it in the belief the mismatch between them could deliver some additional value.

Stothard: It depends on how close you are to a buyout price. If you are very close then you want to make sure you stay very close, and it is understanding that there is a difference between the pricing of the insurer and their own reserve base. You have to fully understand how the price is going to move.

Elliott: That should be tied into your derisking journey part. So where, for example, you are saying we want to get to 95 per cent funded before we hit the trigger, what are you hitting the trigger to do? Are you moving into gilts? Are you moving into an asset strategy that broadly matches what the insurer will take? What exactly does that derisking look like for your scheme?

Kim Nash: The key is to understand what you are looking for. So what is the sponsor looking to do? Can they afford a buyout up to x million pounds? Are they looking to take the risk off the table? What are we trying to do and what are our constraints? I have been involved in a couple of buyouts recently. One of them they could only afford to pay up to a fixed sum so we were monitoring the buyout prices against that, and trying to get everything in order and do everything we needed to do, but actually we had this ultimate constraint we needed to consider.

Robin Bell: In terms of members’ needs and situations, this is like the workings of the engine. If you are in the taxi getting from here to Victoria you want the taxi to get you to Victoria. What the engine has been doing along the way really does not interest them.

Elliott: There is also probably, from a member’s point of view, a due diligence aspect to this because you are moving the reliance on the sponsor covenant to an insurance company for paying those benefits. In general, the assumption is this process provides more security for members because the insurer is more secure than the sponsor of the pension scheme. As trustees, one of the steps along the way to buyout is making sure that is the case and whether that is a reasonable assumption to take – in the majority of cases I expect it will be.

Ian Smith: How about communications and whether the insurer is going to look after members in the way the scheme thinks they should?

Nash: Personally, we have actually gone in and seen the insurers and the systems to understand how their communications would work. We wanted to understand what support the members would actually have through their retirement journey. As trustees we needed to get comfortable that, although we are handing payment of benefits over to the insurer, that they are going to do a good job for those members, their communications are good, they have services in place and the members can ring them up.

Their flexibility, as well, is key. Can they do what we want to do? Can they cover us for GMP equalisation? Can we do our data cleansing later down the line? You are looking at all these different aspects before you decide which players you actually want to go with.

Pink: We have seen potential policyholders assess all aspects of our business, but the things they tend to zero in on are flexibility and the ability to provide the product they are looking for. They often seek different types of additional insurance on top of the standard bulk annuity, including data risk insurance, missing beneficiary insurance, cover against gmp equalisation and reconciliation risks, and benefit specification risk.

Smith: What is that?

Pink: The risk that all the scheme’s benefit documents have not been interpreted correctly and corrections are needed to ensure that people are being paid the right amounts.

Elliott: That is a really important one.

Stothard: So some insurers are prepared to take on all risk?

Smith: You can insure against anything.

Stothard: For a price.

Pink: You are right that once pensions are in payment it is less likely people will complain in the future that they are being paid the wrong amounts; that should have been resolved around the time their pension came into payment.

The security of the insurance company has become more of a hygiene factor and people are looking to their advisers to tell them how the insurance regime works. If they are comfortable with UK insurance regulation and comfortable that the insurance company is properly managed, they find it difficult to pick one insurer over another on the basis of security alone. Price is important: it would be unusual to pick a more expensive provider in the belief they are more secure.