Small schemes offered off-the-peg buyouts to speed up derisking

Derisking is expected to increase as defined benefit schemes look to insure member liabilities, however, for some small schemes traditional buyouts can be expensive and take several months for the transaction to be completed.

So-called ‘productisation’ aims to standardise the buy-in process by schemes agreeing to certain terms before coming to market, which speeds up completion. In turn, this soft commitment increases the chance of an insurer converting those quotations into business and gives schemes transparency over costs.

Emma Watkins, head of buyout business development at consultancy LCP, said it is currently negotiating such buyout contracts with insurers but is ultimately in position to roll it out with immediate effect.

“If someone came and said to us today ‘Can we do that?’, I think we’re sufficiently far in our negotiations with insurers to be able to do it right now,” she said.

She added it would most likely take the form of a 100 per cent buy-in with fixed fees and a streamlined process. “But actually the scope of the project would be to get trustees to a point where they’ve got all of their pensioners and deferreds covered by a buy-in contract that allows them to flip over to buyout as soon as they have gone through the wind-up process,” Watkins said.

In addition to creating a buyout version, LCP is exploring opening up the small-scheme buy-in product to medium-sized schemes and is currently looking beyond its existing panel of four insurers – MetLife, Pension Insurance Corporation, Legal & General and Aviva – in order to do this.

However, consultancies offering similar commoditised buy-in solutions for small schemes are not convinced now is the time to transfer the model to buyout.

Martyn Phillips, director and head of buyouts at JLT Employee Benefits, said while he sees a future for productisation, it throws up complexities.

“By introducing deferred pensioners into the mix, the level of insurer engagement changes, the importance of data quality comes to the fore and the potential timescales are materially extended,” he said. “These challenges can be overcome, but the market will focus first on productisation of pensioner buy-ins until these are well established and then will look to leverage these solutions into the buyout space.”

And Paul Feathers, partner at law firm Wragge & Co, questioned whether a lack of activity in the buyout market at present means there is a commercial imperative to expand the approach.

“There wouldn’t be huge amounts of changes but there would be some. Now might not be the right time, but I would never say never on that,” he said.

Buy-ins and buyouts are essentially based on the same product and so the approach to purchasing a bulk annuity as an investment – a buy-in – will often also work well in the context of a buyout, said Mercer’s UK bulk pensions insurance leader David Ellis.

“This is particularly true where the intention is for the bulk annuity to be split up and allocated to individual scheme members as part of a winding-up of the scheme,” he added.

The derisking market for smaller schemes is fairly buoyant (see graph above from PW 17/06/13) and has been helped by the effort to standardise, according to Michael Abramson, sales director at Legal & General.

“Every time we produce a quotation it is like performing a full actuarial valuation,” he said, adding: “Standardisation has led to more schemes progressing from obtaining a quotation to actually securing a contract.”