More than two-thirds of buyout quotes fail to transact

The figures from Pension Corporation and Legal & General (L&G) reveal costly inefficiencies in the market, where schemes pay unnecessary consultancy fees and providers dedicate time and resources to provide fruitless quotations.

To guard against this, schemes are advised to cleanse their data, set clear objectives and seek indicative pricing from insurers before going formally to the market.

“If transaction conversion rates increase then the expense for providing quotes will drop, which should lead to lower buyout costs for insurers and ultimately for schemes,” said Emma Watkins, director of business development at MetLife Assurance.

“We need to work together as an industry to make that happen.”

Conversion rates

Tom Ground, head of business development for bulk annuity purchase at L&G, analysed the number of buyout transactions over the past year and compared it to the number L&G had been asked to provide a quote on.

This showed just 17% of schemes larger than £500m which sought quotations ended up completing the deal. For schemes between £100m and £500m, the figure was 19%.

These figures compared with 31% for schemes smaller than £10m, and 47% for schemes between £10m and £100m.

David Collinson, co-head of business origination at Pension Corporation, agreed with L&G’s figures, and said the overall rate was 30%. But he added this was up from just 6% in 2008.

Preparation is key

“It’s a big problem with people going to market without being ready,” said Charlie Finch, partner at LCP. “It’s a waste of money for the insurers to keep quoting, but more importantly it’s a waste of time and money for schemes to keep going through the process with all the consultancy fees it entails.”

He advised schemes which are weighing up a buyout to first sit down with their consultant and work out their objectives and then decide what form of derisking deal they want to pursue.

Once they have made this choice, they should ask for indicative quotes from insurers to gauge whether they would be able to afford the deal and whether it is worth going out to the market.

For an insurer to provide a quotation it would need to provide a full actuarial evaluation, for which an actuarial consultancy would charge £20,000.

They would also need to turn it round in four to six weeks, where an actuarial consultancy would take three to six weeks.

“Insurers look at providing a quotation as the equivalent of them giving the scheme a free car,” said Finch. “It’s a lot of work and money for them to put in because they cannot afford to get it wrong.”

As more deals come to the table, insurers will become increasingly picky over which schemes they quote on.

“We do try and filter quotation requests,” said Collinson. “If there doesn’t seem to be any rationale for the request or we can’t see or haven’t had a good explanation of where the money’s going to come from, we won’t quote.”

Cleansing data

Another way schemes can better prepare for going through a buyout quotation process is by making sure their data is in good shape.

John Broker, director at ITM, which advises schemes on managing their data and preparing for buyouts, said the most important information to get in place was members’ post codes, which is necessary for insurers to calculate longevity.

But he also said schemes should make sure they have equalisation data in place – as set out in the 1990 Barber judgement – which is not needed for administrator’s day-to-day work, but is necessary for a buyout.

“The cost of getting the data wrong could lead to a huge expense,” Broker added. “The cost of getting the data right beforehand would be a drop in the ocean in comparison.”

Collinson also stressed the importance of having accurate post codes for members, but said any other missing data would not be essential to provide a quote.

Longevity insurance

Ground’s figures also showed of all the longevity insurance quotations last year, just one (7%) transacted – BMW’s £3bn deal with Abbey Life and Paternoster last February.

This is mainly due to the complexity of the agreements.

But Ground said there was an easy way for the transaction rate to increase, considering there are only eight front-end insurers and five re-insurers who participate in the market.

“Schemes and consultants would be able to make sure it is quicker and less burdensome quotation process if they decide early on the type of insurer they want and the type of structure they want in place,” he said.

“This will cut down the number of quotes they need to seek.”

He added: “The longevity transaction industry is still very young and is suffering from teething problems – hopefully these will soon be resolved.”