schemes are increasingly doing as they approach insurers or following a buy-in. For example, we are seeing more due diligence on insurers’ ESG capabilities and, in some cases, decisions are now being taken based on ESG considerations. Insurers are looking to do more in this area, too. Phelan: An insurer will have more bandwidth to do something on ESG. A lot of defined benefit pension schemes will be with an insurer by 2050, so talking about what their investment strategy will look like by then is not quite truthful, because they will be gone by then.
Why do some schemes opt for a buy-in instead of a buyout? Pickering: You would normally go for a buy-in before a buy- out. One of the challenges on the journey is to determine if you should wait for one big buy-in or do smaller buy-ins along the road.
That is where you need the advice of someone who is expe- rienced and can tell you if you are going to decrease your firepower by doing lots of little buy-ins. Whereas others will tell you that is the way to transition. For technical reasons, most go to buy-in before buyout, which gives you a window to sort out your data and your sleep-at-night policy for the trustees. Phelan: Typically, it is the age of the membership that is going to be a barrier to buyout. It is cheaper if most members are of pensionable age or beyond.
Waiting is an alternative to buy-in or buyout. Having your cap- ital sitting waiting for the scheme to mature makes it cheaper. This also allows you to close off longevity risk, which schemes are not exploring too heavily. Perrella: One of my deferred only transactions was pushed by the sponsor. They were happy to run the risk of a pensioner payroll that in real terms would decline. They would have to pay contributions from the payroll annually but wanted to do a partial buyout of the deferred members, which they saw as the bigger risk. We had a good price from an insurer for that one. It was unu- sual but it makes sense if you have the appetite and funds to pay that deferred premium. Barron: A few things are coming together for schemes. As they de-risk their investments longevity becomes an increased com- ponent of overall risk. At the same time the LDI portfolio is becoming less leveraged. We are seeing buy-in pricing well above the return you could achieve from continuing to hold gilts on some pensioner transactions, which is attractive. In some cases, the sponsor of a larger scheme is happy to take a profit and loss hit, but they want it to be phased to avoid a sin- gle large hit. This can be achieved with partial buy-ins along the journey. Planning ahead and thinking through the timeline has a role to play. Cartwright: When you are doing buy-ins, along the way it becomes an investment decision around are these the right assets. We spend a lot of time with our clients looking at what
If you take a capital- backed journey plan you need to have a stronger covenant so you can
sweat the assets. Jo Myerson, Ross Trustees
14 July–August 2022 portfolio institutional roundtable: Endgame investing
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