The panel discusses bulk annuities.
What can insurers do to make transactions shorter and wind-ups quicker?
Sammy Cooper-Smith: Rothesay Life’s bulk transfer approach to buyout makes it possible to wind-up a scheme very quickly.
This is because on the transaction date, the original scheme is removed immediately and cleanly from the corporate balance sheet.
The receiving Rothesay scheme then deals with tasks such as GMP reconciliation that can take a long time and normally delay wind-up, so that the wind-up of the original scheme is not delayed.
There are a number of ways that scheme trustees can prepare for a transaction, to make the process shorter and more efficient.
Before going to the market, they should have set out a clear decision-making process, including any affordability and selection criteria.
They may also consider delegating decision-making to a sub-committee to allow nimble execution of the transaction.
Advance thought should be given to the assets to be used to fund the premium, along with consideration of the residual assets and any impact on future actuarial valuation assumptions.
Charles Cowling: It usually takes a number of quotation rounds for insurers to produce their ‘best price’ for a transaction.
This is not because insurers like to play games.
Rather, it is due to the insurers’ governance structure and power to make decisions on return on capital and other crucial assumptions, which can be concentrated very high up.
Any pricing process producing a clear best price early on would result in shortened negotiation timescales and faster deals.
Wind-ups could be facilitated by insurers in the following ways:
• Making the ‘buy-in to buyout’ implementation process more flexible, to suit the specific circumstances of each scheme.
• Showing willingness to take on as much of the scheme administration as possible early on.
• Appointing an experienced project manager to take responsibility for a structured implementation process (some insurers are better than others at this).
Insurers could also price ‘all risks’ deals more competitively, although their ability to do this will depend on how confident they feel about data risk, which in itself will depend on the quantity of data they have handled and its quality.
Tom Ground: Transactions require quick and efficient communications from both sides of the deal.
It is in the best interest of both parties for the data to be in a good condition prior to seeking quotations, as it is this aspect that can lead to material delays, particularly in wind-ups when ‘trueing-up’ of data is critical.
The insurer should be pro-active in dealing quickly with trustee queries and comments and should give early sight of any documentation that requires to be completed further in the process.
It is always useful if there is a timetable or project timeline set up early, documenting the process and each party’s role in completing it in good time.
Additionally, getting advisers financial and legal involved in good time, prior to the transaction being completed, should help reduce last-minute delays.
Emma Watkins: Several critical steps in the wind-up process depend on the scheme’s administrator, investment manager and government agencies (NISPI).
The trustees can ensure a faster wind-up by obtaining commitments from all parties to the timelines required.
A good insurer can help the trustees identify issues that have been stumbling blocks for other schemes and suggest achievable, best practice, time frames.
For the transaction itself, the selection process can be used as preparation for the purchase by placing the scheme administrator, investment manager and scheme lawyer in contact with the short-listed insurers to plan for the transaction while price negotiation is continuing.
While this will have a cost impact for the scheme in advisory fees, the elimination of market risk due to the ability to close contracts on the day of final bids and the confidence gained about the quality of the provider chosen are likely to far outweigh the additional cost.
Greg Wenzerul: Insurers will take a necessary amount of time in order to price transactions and evaluate assets.
In our experience, the process is often held up through data, governance, administration, changing goals and targets.
We would recommend the following as key steps:
• Have clear de-risking criteria and goals to which both the company and trustees agree.
• Have a small list of suitably robust counterparties to be your partner for the entire life of your contract, which could be up to 50 years,
• Be prepared to take the opportunities that work for you and ensure the trustees, pensions manager and sponsor have regular interaction directly with the chosen insurer.
If schemes are offered add-ons to allow them to simply extend their de-risking contract in the future then this does make further de-risking, and the move to full buy-in or future buyout, simpler or more efficient.
One example of this is Prudential’s DB Vestings product, which allows further retirees to be included within a buy-in after they retire.
