Buy-ins, buy-outs, consolidation and longevity swaps

The number of pension schemes that are going through the buy-in or buy-out of some or all of their pension liabilities is increasing at a significant pace. 20-20 Trustees have implemented a number of buy-out transactions including for the pension schemes sponsored by Toshiba and 600 Group Plc. We have guided schemes through buy-outs on both a joint Trustee basis and on a sole Trustee basis, and under both models, we have worked to secure members benefits, eliminate unnecessarily high advisory costs and execute the transaction within critical timescales.

It is not only the legal intricacies of the transaction that are complex and need expert navigating; buy-in and buyout transactions also require trustees to consider, amongst other things:

  • How best to approach the insurance market to ensure they get a good price.
  • Which insurers are going to provide the terms that they require, such as coverage for retrospective changes in pensions legislation, missing members due to incomplete data and errors in data.
  • How to project manage the process involving administrators, insurers, investment advisers, sponsors and actuaries.
  • Minimising the movement in the buy-out deficit by adjusting the investment strategy quickly (depending on the insurer’s pricing basis) and negotiating a price lock with the insurer to enable price stabilisation.
  • Dealing with the critical pre buy-out activity such as fixing outstanding legal issues, gender equalisation, dealing with discretionary benefit expectations, communication to members and getting the data ready through tracing exercises, GMP rectification and missing spouse information.

Failure to deal with these issues may materially increase the premium, or at worst, potentially make the scheme uninsurable.

Some schemes, if they are large enough, may conclude that a “synthetic buy-in” may be better value than a full buyout (British Airways and RSA are good early examples), and in these cases, longevity insurance could be required. The longevity market is still relatively immature – there has only been around fifty of these types of transactions by pension schemes in the UK, and only a handful of these have hedged longevity risk in relation to members who have not yet retired. Our trustee directors have first-hand experience of putting in longevity hedging for medium and large sized pension schemes.

A new type of risk transaction vehicle has recently emerged in the form of commercial consolidators, which have been given public support by the UK Government. These consolidators could be attractive for schemes where they are well funded, but a buy-out is an unlikely or very distant objective. Commercial consolidators can provide an off-balance sheet solution for sponsors in this type of situation or where a pension scheme is preventing a good outcome for itself by blocking a potentially value generative corporate transaction. 20-20 Trustees have experience with commercial consolidators and are not averse to utilising these options if the likely outcome for members is demonstrably enhanced.

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