Andrew Cooper, Senior Consultant, Aon
You have determined that buyout is your endgame destination and that your members and their liabilities will ultimately be passed to an insurer. But what does that really mean for your scheme and where are you on this journey?
What is my scheme worth?
In the same way as you might search on Rightmove or Zoopla for recently sold house prices in your area, a logical place to start is by assessing the price of insurance of other similar schemes in the market. To provide the most up-to-date view of current market pricing, we collect pricing information from every transaction process in which we are involved. If you have not assessed your buyout funding position recently, you may be closer than you think. Indeed, schemes that are over 80% funded on a solvency measure could be within five years of buyout.
Financing your move
A key step in smoothing your journey and reducing your time to achieve settlement is ensuring you have the right investment strategy in place. Regardless of your expected time to reach buyout, it is useful to have one eye on the types of assets which will make any transaction easier - such as ceasing investment in illiquid assets that would be difficult to disinvest. Schemes should also focus their investment strategy on reaching that endgame target. This could include attempting to hedge it, either through mirroring the asset classes that drive or by purchasing buy-ins as part of the journey.
Structural survey
Schemes are better placed if they are built on solid foundations. Therefore, it can be prudent to perform a full inspection of the framework of the scheme before buyout. In the run-up to a buyout transaction the scheme can achieve additional reassurance that the correct benefits are being insured by performing a benefit audit. This is a check on members' benefits to ensure they have been calculated in line with the scheme's governing documents. In addition to helping trustees fulfil their fiduciary duties to pay the correct benefit, an audit can reduce the cost of residual risks insurance and avoid any nasty surprises during the broking process.
How to give your scheme serious kerb appeal
Presenting a clean scheme and a clear governance process to the insurance market helps make it stand out in a crowded risk settlement market.
Engaging the sponsor early in the process to ensure that they are bought in with the scheme's ultimate destination is crucial to ensure a smooth journey to buyout. Presenting a united front to the insurance market also reinforces execution certainty and allows insurers to have confidence that a deal can be done if they can provide best pricing.
Data is the building block of any scheme, so pro-actively cleaning data to improve its quality will allow you to increase insurer appetite and achieve stronger insurer pricing. If your target is still a few years away, investing in cleansing data is always time and money well spent. This can both improve the accuracy of payments to members and reduce your risk settlement pricing.
Make your house a home
There are a range of options to make your scheme a more pleasant place to be during the journey. For example, many schemes undertake member options exercises as a way of providing flexibility to their members before retirement, as well as giving certainty to the benefits payable under the scheme. Bulk transfer value exercises for deferred members with IFA advice can provide members with the choice to take their benefits in the manner that most suits their circumstances, as well as providing savings against the cost of insurance.
Schemes should also consider how to make the transition to an insurer as comfortable as possible for members by reviewing member factors and communications in the approach to any transaction.
Utilising specialist advice
It is never too early to start creating a plan and seeking input from a specialist risk settlement adviser. They can be the architect of your strategy, project manage the scheme as it moves through its journey, before being the insurance broker to achieve the best deal for the scheme. Our team of risk settlement specialists has a deep understanding of the insurance market to help you at each stage, achieving the best possible outcome for the scheme, sponsor and most importantly your members.
This post is funded by Aon
