Ahead of a new research series from Pensions Expert into small scheme bulk annuities, members of the Endgame Perspectives Group explore how streamlined services have developed, their limitations, and how they can better serve pension schemes and members.
If we were to build the ideal risk transfer process for pension schemes now, without any baggage, what would it look like?
Perhaps it’s a standardised process across insurers and advisers where contracts, data and assets were ready and agreed, a transaction was completed, the conversion to buyout didn’t require data cleanse and true up, and the member experience from buy-in to buyout and beyond was exceptional.
Sounds good, doesn’t it? But while full standardisation may seem appealing, it means different things to different people and risks undermining the dynamics that make the market effective: competition, flexibility and innovation.
Don’t we have streamlined processes already?
Many companies in different parts of the market have ‘streamlined’ risk transfer offerings that improve efficiency in one area, but potentially at the expense of another.
“An ideal process should reduce time and costs for all, increasing resource capacity, process efficiency and creating better outcomes for members.”
For insurers, a streamlined process can mean following a template that typically requires trustees, sponsors, and advisers to adapt their data and benefit details to meet each insurer’s specific requirements.
For trustees and scheme sponsors, a more streamlined and efficient process might involve a less stringent formatting of data and less need to simplify benefits when dealing with the insurer initially.
Neither party is wrong to want to pass on the burden of streamlining. But an ideal process should reduce time and costs for all, increasing resource capacity, process efficiency and creating better outcomes for members.
Do we even need a fully streamlined process?
When considering streamlining, it’s important that the advantages of the current system aren’t lost. An overreliance on a standardised process could reduce competitiveness in the market – pricing, features and flexibilities offered – while stifling the competitive tension that encourages future innovation.
Is it sensible for asset transfer and contracts to be standardised? What about member administration? It’s doubtful that a blanket approach would benefit all members of all pension schemes equally, given the varying needs of different demographics.
“A completely standardised process probably isn’t the answer. But each party should be doing their part to drive efficiency in the risk transfer process to reduce delays and costs.”
A ‘one-size-fits-all’ process could harm previous steps taken to make the risk transfer market more accessible to smaller pension schemes. Instead, what’s needed is a more agile framework that evolves with the market – preserving what works and improving what doesn’t. Advisers, consultants and administrators should review their own processes to create repeatable, efficient approaches.
A template for data and benefit specification is unlikely to ‘fit’ all schemes, causing additional work for trustees and administrators. There is a need to balance cost and choice for the widest range of pension schemes. Appropriate use of technology and artificial intelligence will be key to finding a solution.
How do we improve issues in key areas?
If complete streamlining isn’t feasible, how can we enable more schemes to access risk transfer and safeguard member benefits?
For trustees and their advisers, a good start is making sure schemes engage early with their sponsors, ensuring everyone is fully informed from the very beginning of discussions. This also ensures that a joint decision-making framework can be agreed at the start of the process, leading to better-suited insurer selection.
Meanwhile, early engagement with the scheme’s administrator ensures there’s sufficient time and planning to address long-standing administrative challenges like guaranteed minimum pension equalisation, reducing the volume of queries and post-transaction data changes.
The data quality required to move a scheme to buyout may be different from the data quality needed for day-to-day administration. How do we balance speed and cost with the need to ensure data is accurate, complete, and reliable? A useful starting point for trustees and administrators is the Pensions Administration Standards Association’s updated guidance from 2023 on data readiness for buy-ins and buyouts.
By working towards this standard, schemes can position themselves ahead of the curve. This proactive approach not only streamlines the process but also enables schemes to address data issues in advance, reducing the likelihood of delays and unexpected costs when the time comes for a buyout.
For insurers and administrators, consistency of the team handling the risk transfer process pre- and post-transaction also makes for a more joined-up experience.
Lessons for the industry
A completely standardised process probably isn’t the answer. But each party should be doing their part to drive efficiency in the risk transfer process to reduce delays and costs. It’s our job to ensure the process creates value for members. For example:
- Structured data cleansing and early validations allow focus on getting the data right, giving trustees peace of mind that the right benefits are insured. This moves the focus from data work to true member experience.
- Flexibility around benefits being insured, meaning members get a better (or full) match to their legal entitlements.
- A streamlined approach through to buyout and wind-up reduces delays and costs, which can be passed onto the member through securing better terms or uplift to benefits.
Overall, there’s a need to identify a balance of choice for different schemes with different complexities and priorities, but with a focus on member outcomes and a streamlined transition to buyout, regardless of which solution is selected.
This article was co-written by members of the Endgame Perspectives Group, a collaboration between a range of providers operating in this area of the industry.
