How to get your bulk annuity deal to the front of the insurer queue

'My bulk annuity proposal was rejected by three insurers – what did I do wrong?' some schemes might wonder. 

Insurers evaluate each opportunity they receive against a standard set of criteria and aim to be confident that all transactions are likely to proceed.

They typically focus on a scheme's level of preparation and the commitment and support of all parties to complete the contract. So what specific steps should trustees and sponsors undertake to grab the attention of insurers?

Build a team

The first step is to build a committed transaction team. Insurers want to know that both the trustees and the sponsor are supportive of the transaction and understand the time and cost requirements.

Providing a comprehensive transaction package at the outset is crucial to grab the attention of insurers

Undertaking a bulk annuity feasibility study provides all parties with an understanding of the expected price of the contract and its impact on both the scheme's funding position and sponsor's balance sheet. The study will also set out a project plan.

These are crucial steps in building the internal transaction business case and then demonstrating this to the insurer.

In addition, the appointment of experienced risk settlement advisers who have strong links to a range of insurers and an established track record of completing transactions will strengthen the case.

These advisers will be able to successfully pitch the opportunity to the insurers, focusing on their key concerns and summarising the trustees' and sponsor's proposal.

Affordability

The second step is to demonstrate the affordability of the transaction.

In many cases the existing assets of the scheme will be sufficient to support a partial buy-in. However, for a full scheme buyout, additional contributions are likely to be required, and an explanation of where these will be sourced and how they have been budgeted for is important.

At this point it is also helpful to provide details of the assets that will be used to support the transaction, particularly if a transfer of existing bonds is being considered. Insurers can then decide whether to accept the proposed assets or if a cash transaction will be required.

Data and benefits

The third step is to ensure the transaction data are clean and complete. Insurance is about taking on risk in exchange for a premium. Clean data give insurers a greater understanding of the risk they are pricing and typically result in lower premiums.

For example, pension schemes can write to members to find out if pensioners are married and what the age difference is between members and spouses. This simple step can result in a material reduction in pricing, which is good news for trustees and sponsors.

Providing a clear benefit specification will also aid the insurers with their pricing. This will highlight whether the scheme has benefits that could be challenging to insure, such as unusual pension increases.

If problematic benefits are found, sponsors and trustees can evaluate whether to offer members the opportunity to reshape their benefits – through a pension increase exchange exercise, for example.

This reshaping may lead to better pricing and further demonstrates the preparation conducted by the trustees and sponsor ahead of transacting.

Provide a package

Insurers invest considerable time and resources in pricing bulk annuity transactions. Providing a comprehensive transaction package at the outset is crucial to grab the attention of insurers.

This well-prepared suite of documents should summarise the transaction rationale and structure, the committed team, and the timescales and benefits to be insured.

Time spent up front pays dividends to all parties with both better pricing and easier transactions. The market is buoyant; don't risk missing the boat. 

Michael Walker is a principal consultant in the risk settlement group at consultancy Aon Hewitt