23 September 2016
Evidence shows smaller schemes are getting “crowded out” as many pension schemes, both big and small, are heading to the same end-game at the same time. In fact, the number of buy-ins and buy-outs under £100m has reduced by 25% year-on-year since 2013, while transactions over £100m continue to reach record levels.
This means for smaller schemes looking to de-risk through buy-ins or buy-outs, it is more important than ever that they engage effectively with insurers to get the best price and terms.
So what’s the implication for small schemes that fail to get engagement from insurers? Our research shows that schemes who fail to get “engaged pricing” from insurers can pay up to 5% more. Over-paying aside, this can also lead to otherwise feasible transactions not completing as they are deemed unaffordable or poor value.
As a partner in the insurance de-risking practice at LCP, I have helped 16 smaller schemes successfully complete buy-ins and buy-outs over the past 5 years. Below I share my top 5 tips for smaller schemes looking to be more attractive to insurers.
My top 5 small scheme tips for engaging effectively with insurers to avoid over-paying:
1. Know your options
Buy-ins and buy-outs are just the beginning. Throw in longevity swaps, medically underwriting, top-slicing, deferred premiums, staged buy-ins, etc and things can start to get confusing. Not everything is suitable for smaller pension schemes. The key to choosing the right path is to understand the options and what is right for you. And if you are not clear on what you want then it is unrealistic to expect the insurers to properly engage.
Working with an adviser who knows the market well will help give you a leg up to find the best de-risking route for your circumstances. In my experience, many pension schemes find that a specialist insurance de-risking adviser working in collaboration with your existing advisers is best placed to manage you through this maze of options.
2. Think about timing…
Despite the record insurer capacity that we predict for 2016, this may not be directed towards the smaller transactions, and it may not be available long-term (eg due to reinsurer capacity constraints). In addition the demand from larger schemes is only likely to grow as many head towards the end-game at the same time.
For smaller schemes, you should start to factor the timing of ultimate buy-out into your overall de-risking strategy. It may also be worth considering whether a partial buy-in now could help manage the risk of buy-out pricing increasing in future.
3. Data, data, data (and don’t forget benefits)
Data is a hot topic at the moment with encouragement from the Pensions Regulator to get your data in good order and GMP reconciliations forcing schemes to review past benefit calculations. However, the data required for everyday administration of your scheme is not always sufficient for a de-risking exercise. Missing or incomplete data used for pricing can result in the premium provided being uncompetitive. An experienced insurance de-risking adviser can help you understand what data an insurer requires and help you focus your data cleansing on that that will really drive the price.
Also, don’t forget your benefit specification. This should be complete, accurate and signed off by your lawyers so that it reflects the benefits provided under the rules. Why is this important for de-risking? It not only ticks the insurer’s box when a legal review has been completed, it also ensures that the benefit specification is not ambiguous, leading to consistent premiums between insurers.
4. Be ready to act when an opportunity arises
Insurers calculate premiums differently to how trustees value their liabilities. This means that changes in market conditions can offer pricing opportunities and with the current level of volatility in the markets now is a good time to start monitoring this. A good way to do this is through real time models to which insurers provide regular pricing information. See LCP Visualise insurer pricing tracker.
The advantage small schemes have is that they can be nimble and move far more quickly than larger schemes when these pricing opportunities arise. You should consider your governance process (with both the trustee board and the sponsoring employer) including what price both parties would agree to transact at and other pre-conditions such as around funding. This means that when these agreed metrics occur, the scheme is in a position to move quickly to transact.
5. Ask insurers for the right things
It is not just price that you need to agree with insurers but also a set of commercial terms such as how their price changes with market conditions, how you pay the premium, how data and benefits are corrected and the calculation of the adjustment premium for these corrections, amongst a wide range of other terms that can have a monetary impact.
Accepting the insurer’s standard terms is likely to result in a very insurer friendly outcome but equally seeking terms that the insurer just won’t accept will waste time and generate costs. In my experience there is no better option available to smaller schemes than using a streamlined service with pre-negotiated insurer contracts. These contracts offer enhanced terms compared to an insurer’s standard contracts and are based around the types of terms insurers offer to much larger transactions. From the insurer’s perspective they offer an approach without the expense of legal costs and it increases the probability of transactions completing as process times are shortened and there is no risk of protracted legal negotiations, causing the insurer to have greater engagement and therefore better pricing.
LCP’s fixed fee streamlined service is suitable for pension plans considering buy-in or buy-out transactions of up to broadly £100 million. LCP also offers a service with full flexibility over the terms and process, typically used by larger schemes and those wishing to include more bespoke features.