News analysis: Schemes have been urged to get prepared for bulk derisking deals to benefit from affordability improvements, but one provider has said the necessity of preliminary work is often “overemphasised”.
Rises in yields and equity markets have boosted scheme funding positions, and Q3 and Q4 – traditionally the most popular time of year for such transactions – is anticipated to be the busiest on record.
Schemes considering derisking in this way are frequently urged to show providers commitment in advance, for example by carrying out a data cleanse and completing other administrative processes.
However, while those already at this stage of the quotation process are best placed to move quickly, schemes considering buyout “should not be put off”, said Tom Ground, director of bulk purchase annuity business at insurer Legal & General.
“The level of preparatory work is often overemphasised and it is possible post-contract to make adjustment for reasonable data and benefit changes,” he added. “The bulk annuity market remains a competitive market with plenty of capacity.”
The consensus view
Consultancy Aon Hewitt, in its September ‘UK risk settlement’ report, said it was "unlikely" unprepared schemes would be able to benefit from brief market opportunities.
Although it added that providers are open to innovation in their contract structures "to help schemes resolve potential barriers to freeing up assets for a favourably priced transaction".
Capacity in the insurance market is able to cope with the current spike in activity, said Emma Watkins, partner at consultancy LCP. She added that schemes able to demonstrate a commitment to derisking through an annuity contract are likely to get “a good level of engagement from the marketplace”.
“Longer term, I would predict that insurers will be increasingly selective when choosing transactions on which to focus," she added. "This will clearly bias insurers’ interest to schemes that have prepared and engaged with the market in advance.”
Sadie Hayes, senior consultant at Towers Watson, said that while the consultancy had witnessed increasing numbers of ‘all-risk’ buyouts – where data and benefits issues have not been completely ironed out – due diligence is of key importance.
“Even in a well-run scheme there can be issues, just because [of] the number of changes that have happened over the years,” she said.
Hayes added that schemes relying on asset increases to reach buyout, rather than a contribution from the sponsor, might mean that not all will see the current situation as an opportunity and may have to wait longer before engaging with the buyout market.
“If you’re in a position where you need 20 per cent more assets and your sponsor can’t put the money in then you’re not going to get there,” she said. “[Have] a sensible conversation with the sponsor about the benefits for all parties of potentially achieving a buyout.
"Then if you can get a commitment or an idea about at what level this might be something the sponsor will go for, if you’ve got a clear target in mind and you can discuss that with the market you’ve got a really strong case for why they should take you seriously.”
Schemes are relatively slow to react to price improvements and the process from approaching insurers to being in a position to transact typically takes at least three to six months, which can mean opportunities being missed, said partner at Aon Hewitt Paul Belok.
“Where schemes are keen to time the market we're therefore encouraging them to set up trigger-based approaches and to prepare the ground in advance to allow them to move quickly,” he said. “For one client, we were able to ensure they could transact on the day that the trigger was hit.”
