Industry view – Pension Insurance Corporation
what can trustees do to get ‘transaction ready’?
There are several considerations to make in preparation and, as I’ll explain, the best time to start is now.
Mitul Magudia is head of business develop- ment at Pension Insurance Corporation
GET ‘BUYOUT READY’
Pension funds find themselves better funded than ever due to the significant increase in gilt yields. Lane Clark & Pea- cock’s (LCP) analysis at the end of October suggested that almost one in five schemes are now funded on a buyout basis, with funding levels up 15% on last year. Alongside this, market volatility has brought into focus the security that buy- out can offer. For trustees, members’ ben- efits are guaranteed, and corporate spon- sors can insulate themselves from future cashflow crunches.
The result of this is that the buyout mar- ket will likely be at its busiest in the next few years: LCP predicts that more than £200bn of liabilities will be transferred to insurers in the next three years, when vol- umes were around only £30bn in each of the past two years. The market is expected to remain strong beyond this. In June, before the spike in gilt yields, Hyman Robertson estimated that around £1trn of pension scheme risk would be insured or transferred to third parties by 2031. Given the volume of deals expected, one of the issues trustees are predicted to face is competition for insurer capacity, so
One of the barriers that many schemes face is inadequate data. Inaccurate records of scheme members’ benefits make a pro- spective buyout less attractive to insurers and there will be an associated premium in the buyout price for taking on the risk. Schemes considering a buyout should fill as many gaps in their data as possible: establishing what information is missing is important. For example, the marital sta- tus of scheme members can be an area where data is patchy, impacting the price insurers offer. Alongside this, a full legal review of the scheme benefits to clear up what their members are entitled to will help insurers effectively price the buyout. Having member information in good order can help convince an insurer that the buyout will be an efficient transaction and will lower the cost of the transaction. Schemes should get a pragmatic adviser for the transaction. Buyouts are complex so seeking advice is important to ensure the right strategy is in place to achieve it. There are many businesses that can sup- port in this regard. They will often be able to assist across many areas including gov- ernance, investment strategy, liability management and actuarial advice. With the right adviser, schemes can better understand the costs of a buyout and build a plan that suits the scheme to get there. This could include a phased approach, with many schemes opting to offload part of the risk initially, through a buy-in, as the first step for a full buyout.
There are many elements that can make a potential buyout more attractive to an insurer. These range from having the right advisers, whether commercial, legal or actuarial, through to having a profes- sional trustee on the board with a record of going through the de-risking process. A major improvement can be made through creating the right governance structure. Establishing a buyout sub-com- mittee, meeting on a regular basis, can ensure that the trustee board is able to- respond to the stages of the buyout effec- tively. Quarterly trustee meetings will not be enough. Finally, start now. The schemes that have their house in order ahead of time, are those that are most likely to be attractive to an insurer.
A buyout is a process and those that start earlier will be more successful. Schemes should be prepared to execute as soon as economic and market conditions are favourable. This means being ready to transact ahead of time. Buyouts are likely to be in high demand in the next few years. Although the best approach for schemes will depend on their individual circumstances, whether that is the size of the scheme, its invest- ment strategy or its available resources, taking steps to prepare sooner not later is good advice for all. So, by having a clear picture of gaps in your scheme’s data, ensuring you have expert advice available, by taking care to create the right governance structure, and starting as soon as possible will help you get ‘buyout’ ready and give you the best chance of managing the cost of a transac- tion effectively.
Publisher portfolio Verlag Smithfield Offices 5 St. Johns Lane London
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Editor Mark Dunne
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portfolio-institutional.co.uk
Senior writer Andrew Holt
a.holt@portfolio-institutional.co.uk 10 | portfolio institutional | December-January 2023 | Issue 119
Publisher John Waterson
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Business development manager Basit Mohammed
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portfolio-institutional.co.uk
Head of roundtables Mary Brocklebank
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CRM manager and business development Silvia Silvestri
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