As derisking plans accelerate and sponsors seek to reduce the volatility of defined benefit scheme deficits, buy-ins are becoming increasingly attractive.
Demand for bulk annuity buy-ins is set to ramp up over the next 15 years, and an estimated £700bn of DB liabilities could have been passed to insurance companies by 2032, according to a recent report by consultancy Hymans Robertson.
A number of deals have been revealed during the third quarter of 2017. In October, Smiths Industries secured a £207m buy-in with Canada Life, while the Pearson Pension Plan signed off on buy-ins totalling £1.2bn.
More recently, the Former Registered Dock Workers Pension Fund completed a £725m full buy-in with the Pension Insurance Corporation.
In recent years, improvements in life expectancy in the UK have slowed down, the Office for National Statistics has said, although it added that there is debate over whether this shows a new trend or a short-term ‘blip’.
These lower rises in life expectancy affect pricing and can improve affordability. However, if trustees wish to secure a deal, they must take steps to make sure their scheme is prepared.
The Merchant Navy Officers Pension Fund is due to complete a buy-in and is looking to consolidate its money purchase section with the Ensign Retirement Plan, the mastertrust for maritime workers.
We have recently entered a period of exclusivity with our preferred insurer
Andy Waring, MNOPF
The MNOPF, a multi-employer scheme, which provides pensions for ship’s officers and their families, established a new defined benefit section for service from April 1978. Its contributions were kept separate from those of the old section, which was closed to new contributions that year.
The MNOPF closed its new section to future accrual in 2016 and said it continually looks for options to derisk.
Buy-in is expected this month
Andy Waring, MNOPF chief executive, said: “If the market conditions are right, the trustee would look to complete a buy-in before Christmas.”
He added: “We have recently entered a period of exclusivity with our preferred insurer.”
Waring noted that the fund has always been an early and significant player in this area. In December 2012, the trustee insured all of the benefits of the old section not insured through a previous bulk buy-in.
‘Nimble’ governance allows for quick move
Buy-in and buyout volumes reached £5.1bn in the first half of 2017, according to consultancy LCP.
There are currently eight active providers in the buy-in market since Phoenix Life started participating, and buy-in pricing has been particularly attractive in this competitive market.
Waring explained that the MNOPF’s “nimble and effective” governance structure enables the trustee to be proactive and transact quickly to make the most of pricing advantages.
“The MNOPF journey plan is about securing the promise to members, and we aim to do that by 2025,” he said. At that point it is expected that the MNOPF will be funded to 103 per cent on a gilts basis.
“You can probably read something into how we dealt with the old section to see which options might be considered,” Waring added.
How to anchor a deal
When looking to secure a buy-in, schemes must be prepared. Ensuring a good governance structure for effective decision-making is important, and trustees should make sure data quality is appropriate for transaction purposes, said Gavin Markham, partner and head of bulk annuities at Barnett Waddingham.
Carrying out a pension increase exchange exercise in advance could improve affordability if a pension scheme has relatively expensive increases to insure, Markham noted. As part of this, a scheme “may have been through a data cleansing exercise”, thus improving data quality.
However, Markham highlighted that “not all schemes looking at buy-ins will go through those kinds of member option exercises”.
When it comes to investment strategy, he said if a transaction is potentially imminent or a scheme has already approached the market, a scheme may be looking to match this more closely with how the insurer pricing might move.
Trustees should also keep an eye on “what kind of assets the insurer might be willing to accept as part of a sort of in-specie asset transfer to support the transaction”, Markham added.
Admin issues can crop up in buy-ins
It is often assumed there are few administrative issues when it comes to buy-ins. In most cases, “there is no transfer of operational accountability from an administrator to an insurer”, explained Dan Taylor, client director at administrator Trafalgar House.
However, Taylor argued that buy-ins commonly present two main problems that are often overlooked.
“The first is the process of reconciling active liabilities against the insurer’s records, which often results in additional work and process controls,” he said.
“The second issue that can sometimes arise is managing a segregated payroll between insured and uninsured liabilities,” he added.
Plans to merge money purchase with mastertrust
The planned buy-in is not the only significant move on the horizon for the MNOPF. It is also looking to reduce risk through the consolidation of its money purchase section with the Ensign Retirement Plan mastertrust.
Last week, the government set out draft regulations for DC mastertrusts, highlighting that the number of mastertrusts may decrease from 87 to around 56 due to consolidation.
When the MNOPF closed to future accrual last year, actively contributing members were enrolled into a new defined contribution section called the Ensign Retirement Plan.
This new section is one of two Ensign Retirement Plan arrangements. The other arrangement is a mastertrust that stands alone outside the MNOPF, and all new maritime employers and their employees are able to join.
“Considering the long-term objectives of the MNOPF as a whole, together with increasing regulation and associated costs being introduced for mastertrusts, the trustee feels that such a merger could be advantageous to the members of both schemes, through a strengthening of the sustainability of the enlarged Ensign Retirement Plan,” Waring explained.
Subject to several legal and technical steps being completed, “not least the trustee confirming its in-principle decision to consolidate the schemes”, Waring said there are plans to complete the merger during the first half of 2018.
He added that the MNOPF considers that the consolidation of the money purchase section into the Ensign Retirement Plan, and therefore outside of the fund itself, is “a logical step” in its derisking and simplification journey.
Actuarial certificates needed – for now
Alice Honeywill, partner at law firm Burges Salmon, said that because of the new mastertrust regime, lots of mastertrusts “are considering their position”.
There are certain barriers to efficient DC consolidation, such as the need to obtain an actuarial certificate for bulk transfers of DC to DC pensions without member consent.
Honeywill highlighted that the government’s draft regulations, which were published in October this year, are “looking at removing that actuarial certificate requirement, for at least pure money purchase benefits where there’s no related guarantees”.
In investment terms, Honeywill advised that “trustees need to consider if there’s going to be any particular issues with exiting any of the current investments, if they are not able to transfer across in-specie”.
