Increased competition for defined benefit (DB) pension schemes’ de-risking business in the UK has resulted in many insurers offering value-added incentives to better attract trustees and sponsors, which now includes services to help schemes complete the often time- and resource-heavy move from buy-in to buy-out.
A number of insurers are offering to carry out post-transaction tasks that scheme administrators would ordinarily be expected to perform, according to recent research by Hymans Robertson.
These services include data-cleansing projects, which are required to ensure all scheme members’ details are accurate before their pensions are converted to annuities.
And promises to fast-track buy-outs through more efficient use of data have gone hand-in-hand with insurer investment in artificial intelligence (AI) to streamline their data processes.
The developments come as surging demand for pension risk transfer (PRT) deals has pushed transaction costs down to levels where insurers find it difficult to compete on price alone. Instead, they are seeking to differentiate themselves in the market with post-transaction incentives.
“Factors have moved on, to consider a lot more non-pricing factors, and that’s where insurers are starting to make more of a differential,” said Darren Masters, a Professional Trustee at Capital Cranfield.
“There are pockets of really experienced, really developed, offerings that are very clearly differentiated in that space.”
The timetable to buy-out can be long, arduous and expensive for schemes. After transferring its liabilities and assets to an insurer through a buy-in, the sponsor and trustees remain responsible for managing those plans until the buy-out fully transfers all responsibilities to the insurer.
During that period, those annuities must be matched to members’ pension plans and benefits, requiring detailed investigation of each individual and their personal data.
The average time between buy-in and buy-out is about three years. The exact time it takes can vary depending on the number of members in a scheme, the quality of the data held on them and the resources of the administrators.
Much of the work involved in the buy-in to buy-out process can be difficult, especially for smaller schemes, who will usually rely on advisers to provide third-party IT services for their data cleansing and GMP projects if they don’t have an in-house tech team; insurers have begun offering post-transaction services because they have recognised the cost implications of delay, said Alan Pickering, President of BESTrustees.
“What it is doing is taking some of the grief out of it that for many employers and trustees… are really stretching corporate intellectual bandwidths at a time when doing business is already quite challenging,” he said.
There is a quid pro quo for insurers offering these enticements, especially with regard to data cleansing.
Because they will be obliged to provide the same services to scheme members after wind down, insurers want to ensure that the data they receive on each individual is correct. It makes sense for them to take on at least some of the post-transaction tech work to ensure the information is received in a way their tech systems can digest.
“If the insurers can play their part in accelerating the project work… that really is a win-win – they get the data in the form they want and the trustees know that they’ve found a good home, and the employer is able to say I’ve done a decent job, I’ve handed over this legacy in a responsible manner,” said Pickering.
The new offerings from insurers come at a timely point for schemes because forecasters warn that the time between buy-ins and buy-outs is widening. Although last year saw a record 160 schemes buy-out, and another 300 are looking likely this year, many more are still languishing between buy-in and wind down.
Hymans Robertson said that more than 500 schemes will already be working towards a buy-out in the next few years. Hundreds more will be added as more schemes de-risk, arguably placing a capacity constraint on the industry.
Capital Cranfield’s Masters – who said he knows of schemes that are still awaiting buy-out after more than seven years – warned that the data challenges are the “biggest brake” on progress as actuarial teams, administrators and data specialists face a “capacity crunch” that is extending completion times.
“Typically, schemes might have said they can do this in an 18-month to two-year timetable but that now looks ambitious,” he said.
“Two years to two-and-a-half years is an average expectation of a timetable. It can be done quicker, but it really relies upon that quality of data going in.”
Schemes can, indeed, wind down quicker if they are prepared before buy-in. UK engine maker Rolls-Royce, for instance, completed a full buy-out with Pension Insurance Corporation last month, just nine months after it struck a £4.3bn buy-in transaction for the 36,000 members of its DB pension scheme. And early this year, auditing giant Deloitte signed a £700m BPA deal that it expected would be completed with a buy-out four months later.
Experts suggest levels of preparedness depend on the size of the scheme, with larger ones being able to fund in-house teams that can get deals in shape before transacting.
But with insurers also facing reputational risk if the schemes they are absorbing take a long time to wind down, there is growing emphasis across all scheme sizes to bring deals over the line with as little delay as possible.
“If you can choose a risk transfer partner who will not only take on board the risk but will take out some of the friction associated with getting from where you are to where you want to be, that is really, really attractive both to the trustees and to the plan sponsor,” Pickering said.
