Yawar Choudhry of Legal & General looks at factors trustees should take into account when embarking on a buy-in or buyout
Over the past 10 years, over one million members of company defined benefit pension schemes have had their pensions secured through insurance companies, such as Legal & General. These arrangements are known as pension buy-ins and buyouts, and they enable companies to honour the pension promises that they have made to their current and past employees.
While the benefits of a buyout to companies and the trustees who run the schemes are well known, understanding among members - those whose pensions are transferred to the care of the insurance company - is often less developed. There are real benefits to the end member that are sometimes underappreciated.
First and foremost among these is that the security of a member's pension is enhanced as they move out of the pensions environment and into regulated insurance. The other major benefit can be the long-term customer care the members receive.
In a buyout, the trustees will be expecting the insurer to look after their scheme members for decades to come. And therein lies an interesting consideration - is an in-house or outsourced administration model better?
At Legal & General we choose to carry out all of our pension administration in our customer service hubs in Cardiff and Hove. Other insurers choose to outsource their administration, and clearly there are pros and cons to each approach.
Several third-party administrators have experience administering pensions, can offer flexibility around service level agreements and potential cost savings for the insurer, which may be reflected in the final premium offered.
As part of their due diligence, trustees will naturally want to look at the technical expertise and internal resources of the administrator but wider considerations may also come into play such as how long the administrator in question has been in the sector, their financial stability, and the likelihood that they will remain in situ. Some third-party administrators are involved in a range of industries and pensions administration is a small part of a wider offering.
Assessing the size of the administrators' customer portfolio versus the size of the scheme membership might help to shape a trustee's thinking. The profit margins in the third-party administration sector are under stress, with some companies having moved out of this space. Insurers may decide to change partners for commercial reasons, which in itself can create some nervousness with members
Similar to our peers, we have debated these issues internally at Legal & General. While people across the industry will have a range of views on the subject, we don't feel an outsourced model could work for us as it means losing the direct relationship with scheme members. We reached the firm conclusion that customer care is at the heart of our buy in and buyout promise.
Last year alone we paid over £2bn to trustees and members - roughly £5.5m a day. This is a huge responsibility that we do not take lightly. As a fully regulated insurer, the FCA requires us to demonstrate how we look after customers who are considered 'vulnerable'. An example of this is the specialist training that our staff undertake through our charity partners such as Samaritans and Age UK.
While cost will always be an important consideration, we believe it is imperative that you can secure positive member outcomes.
Trustees considering a buy-in
Whilst the insurer's administration model has little bearing in a buy-in as the trustees usually retain the administration responsibility, it should still be a consideration as many schemes will eventually move to a buyout. Depending on the insurance contract and which members are covered, the trustees and will need to work closely with the insurer to make sure scheme member movements are shared on. If not planned and managed effectively, this can lead to under or over payments.
Schemes that choose a phased de-risking approach with multiple insurers may need to actively encourage the administration teams of different insurers to work collaboratively. It is worth asking your insurance partner about their experiences and how they would approach this scenario.
Long-term thinking
Next time you are speaking to your advisers or prospective insurance partners about a buy-in or a buyout, we would encourage you to ask about the insurer's customer service model. As ever with these transactions, early engagement gives you the opportunity to make the most informed decision about the best arrangement for your scheme.
Yawar Choudhry is head of client services propositions at Legal & General
