PI Partnership – Aon


buy-in transaction are often favoured by insurance compa- nies. Why? Because it demonstrates good preparation and a commitment to transact, and this can ultimately lead to bet- ter pricing offers.


Lucy Barron is head of investment risk settlement and an investment partner at Aon


While securing buy-in or buyout may require a financial contribution from the sponsor, this can be reduced, or even removed, through diligent preparation of data and benefits and by well positioned assets for any upcoming transaction.


PLANNING FOR BUYOUT – OPTIMISING YOUR POSITION WITH INSURERS


Many schemes choose full buy-in and subsequently buyout as their ultimate endgame, driven by the certainty that pay- ments will be made to members as they fall due. However, any number of risks can emerge through the process.


One such risk is that posed by assets not matching move- ments in the scheme’s liabilities. Schemes have generally tried to mitigate this risk using liability driven investment (LDI) and gradual asset de-risking. However, early strategy- setting and a flexible asset toolkit can also play an important role in risk reduction.


Strategic buy-ins For schemes with a longer time to buyout, generating high returns to outperform the liabilities may seem like the only option to improve funding levels albeit with the potential for significant volatility along the journey. However, the insur- ance market may offer options to help stabilise the funding position through a phased or partial buy-in approach – a strategy favoured by a growing number of schemes. Buy-ins also have a role to play when schemes reduce their invest- ment risk and find that longevity risk becomes increasingly significant. A partial buy-in involves investing in an asset which exactly matches the risk profile and cashflows of a pre-determined section of your liabilities (usually pension- ers). Using a strategic buy-in can pay dividends in dampen- ing funding volatility. Additionally, recent market experi- ence show that schemes that have already completed a


Asset preparation


As a scheme gets closer to buyout, structuring the invest- ment portfolio so that it more closely matches the risk pro- file of the liabilities can be done in various ways. For exam- ple, gradually reducing allocations to growth assets and replacing them with less risky and better matching assets can help to stabilise funding levels. Also, investing in assets which hedge interest rate or inflation risks and better match the credit sensitivity in insurer pricing can allow assets to move in line with the corresponding hedged liabilities. For some schemes, the investment strategy may be anchored by an illiquid asset, such as a holding in physical property, closed-ended direct lending or property debt funds. Forced selling of this asset, to make room for a transaction, could mean having to accept a lower price than expected, ultimately creating a shortfall from the premium payable. Thinking in advance about the exit strategy from assets such as these (as well as considering possible timeframes and targets before investing in new illiquid assets) can help to maximise the return achievable and avoid delays when transacting with an insurer.


Price-lock portfolios


In the years and months ahead of a potential transaction, it is also helpful to consider which assets may be attractive to insurers as part of a transaction. Many insurers will provide a ‘price-lock portfolio’, which means that during the negoti- ation phase of a transaction the price payable will move in line with an agreed basket of assets until the deal is done. Investment in the types of assets typically included in these price-locks will mean that good preparation will not be undone in the final few weeks before completing a transaction.


20 July–August 2022 portfolio institutional roundtable: Endgame investing


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