This case study looks at how a combination of clear strategy, collaboration and careful preparation helped in securing a buy-in, quicker than first anticipated, and under budget.
In 2019, as the Independent Trustee in relation to a relatively small scheme (500 members), we agreed a short-term target with the company to buy-out the scheme with an insurer.
- As part of the valuation, we negotiated material company contributions to be paid to the scheme, including a bullet payment to be paid once the scheme came within a certain proximity of buy-out.
- We set up a Joint Working Group (JWG) to help accelerate the journey to buy-out.
- We carried out a feasibility study; enabling us to understand the cost to buy-out and set our strategy.
The JWG consisted of 20-20 on behalf of the Trustees; the JWG advisers; and a representative from the company. Not only did the JWG help keep all parties focused and working together, but importantly, it also gave the company and the Trustees the ability to make decisions quickly and to ultimately take advantage of market opportunities.
Over the course of the next 12 to 18 months, we carried out several key activities:
- Ambition letter – The Trustees wrote to all the scheme’s members with an ambition letter, setting out the aim of the company and Trustees to target buy-out, as well as referencing the company’s intention to carry out a member options exercise
- Member options exercise – This involved writing to all deferred members within the scheme, detailing their benefit options, and providing them with the opportunity to take paid for financial advice. This was a company led exercise, aiming to bring buy-out pricing closer to address the funding gap but was supported by the Trustees, as it enabled members to make informed decisions regarding their benefits. Member engagement was high.
- Monitoring pricing – While the member options exercise bought buy-out pricing closer, the funding gap was still too large to be bridged by the bullet payment, so we continued to monitor pricing monthly.
- Full preparation – We fully prepared the scheme to approach the market. This included reviewing the requirements of the scheme’s rules and producing a clear and concise benefit specification. The scheme’s legal advisers also produced a codified discretions summary.
In May 2021, the monitoring showed buy-out pricing had moved within the required range, and in August 2021, we formally approached the market, with the full scheme buy-in completed in December 2021.
By using a combination of collaboration through the JWG, effective communications (both with the insurers and members), and solid foundations in ensuring full preparation to approach the market for buy-out, we’re now in the process of transitioning the buy-in to buy-out; aiming to do this within the next 6 to 12 months.
Preparing a scheme for buy-out takes a lot of work, and there are no shortcuts… but done correctly, it can be a lot smoother and quicker ride than many usually expect!
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