Considerations Throughout Your Endgame Solutions Journey

Before approaching a risk broker, it is important to determine whether buyout followed by scheme wind-up is the best option to meet the objectives of the trustee and sponsor. Other solutions could be up for consideration, including areas such as phased partial buy-ins; pension increase exchange exercises; trivial commutation exercises and the use of master trusts and superfunds etc.

Solutions can certainly be found for small schemes. When the buy-in market is very busy, the number of insurers willing to quote may be limited. In these circumstances making your scheme attractive to the market and being “transaction ready” is key. This is when having the right risk broker for your size of scheme is so important.

It is generally worth performing a benchmarking through a limited tender exercise, even if the conclusion is to use an existing adviser (often connected to your actuarial provider given the size of the project). It is not unusual for the risk broker to be independent of the actuary and having a fresh perspective can add value. Also, depending on the scheme size, having a risk broker who has direct experience with the size or complexity of your scheme can help to engage the right insurer.

As well as fees, we focus on the depth of their resource and experience in the team. Placing a scheme with an insurer inevitably has times when things don’t go quite to plan, so it is important your risk broker can always respond to issues in a timely manner. Being able to demonstrate successful transactions relevant to your scheme and a strong project management approach are also important evaluation criteria.

Our independent project management provides a valuable service by offering unbiased oversight, expert input and a robust project management framework. Because we do not offer other services such as actuarial, risk broking administration, legal or investment consultancy we are able to align with the trustee and oversee the management of the various advisers involved in a buyout project.

For a journey to buyout, we believe the first stage is best managed by the risk broker and we can provide additional governance oversight, and across the buy-in to buyout phase we can help with agreeing a new risk management framework. For run-on and consolidator strategies, we oversee the implementation of new investment governance frameworks and ensure the scheme is in the best possible position for the ultimate end destination. Our support is always tailored to ensure the ideal level of oversight is provided whilst still remaining a cost-effective solution.

Seeing a scheme through to buyout is a complex process and by its very nature, not one that is repeated by many trustee boards. Depending on the experience of the existing trustees, it can be beneficial to appoint an additional independent professional trustee to provide specialist technical knowledge throughout the process in areas including de-risking, member communication, strategic planning, etc. In general, we find that the greatest value is often added by bringing in additional expertise before a buy-in is undertaken and insurer contracts are agreed.

The journey to closure is arguably the most crucial step in the life of a scheme. Whilst it is an attractive proposition to rush a buy-in when the market is right, the journey should ideally be planned over a number of years to reduce the number of bumps in the road. Every scheme is different and will take their own journey to wind-up. Our experience suggests that generally a reasonable timescale from project initiation to completing the wind-up would typically be up to 3 years.

One of the biggest risks is unexpected costs. There are numerous issues that can arise during what is a complex project, all of which cannot only cause significant increases in adviser fees, but can also lead to timescale issues. In the worst case, revised pricing terms may be offered by the insurer that causes an increase in the premium to secure the benefits. In our experience, the best way to minimise these risks is spending time at outset and analysing where issues might arise.

It is not unusual for plans to change, sometimes the position of the Company changes in terms of affordability, sometimes there is a need to adjust timings due to the impact on the Company balance sheet. Last minute changes at the buy-in stage should be avoided as this could jeopardise future relationships with the insurance market. However, work done on scheme data, benefit structures, etc are never wasted and it is not uncommon for the length of time between the buy-in and buyout stage to change from the initial plan.

The main reason we see unexpected costs include: issues arising during the data cleansing period post buy-in; increased adviser, provider, and administration fees due to a delay in finalising the buyout; and increased cost of trustee insurance or inadequate/complex covenants with the scheme sponsor.

Our extensive industry knowledge means that we have instant access to comparable fees and we can provide a high-level benchmark on reasonability of fees. We have a bespoke budget monitoring system designed to provide monthly updates and forecast across scheme years as an annual budget has limited value for reporting a project of this nature.