Try our new wind-up readiness tool
Are you ready to wind-up?
04 Mar 2021
Our new wind-up readiness tool is live!
As we start to see more pension schemes approach full buy-out funding, we surveyed 100 DB pension scheme trustees to assess their state of readiness to complete a wind-up.
- Over 50% said most aspects of a wind-up project, including data cleansing and making assets transferrable, would be challenging; and
- 85% said managing the project through to wind-up would be particularly challenging.
While a wind-up is conceptually simple, in practice it’s often the most complex and costly project that a scheme will ever undertake.
Do you understand the challenges that your scheme might face? Let’s look at some of the common ones:
Closing the gap
Can you afford the cost of buying members’ benefits with an insurer?
Most schemes can’t. However, you can put in place a plan to meet the buy-out shortfall over a period of time and have this agreed by the company.
Do you actively monitor the buy-out market?
Keeping an eye on the market allows you to understand how far away you are from affording the cost of wind-up. And once you get close, it allows you to respond if pricing become more favourable.
How much risk do you hold in your asset portfolio?
Typically schemes de-risk on their journey to full buy-out, potentially implementing partial buy-ins as part of their wider strategy. You will want to review your investment strategy to make sure that it ties in with how you expect the buy-out funding gap to be closed, so you have an appropriate amount of investment risk at each stage.
Do you hold any illiquid assets and do you have a plan to exit them?
While insurers may accept a payment via the transfer of assets, these assets are almost invariably liquid assets that the insurer can use in their own portfolio. If you hold other illiquid assets you will need to decide when and how to sell or otherwise deal with them.
Open or closed
Is your scheme open to future accrual?
To wind-up, members can no longer be accruing benefits in the scheme. If your scheme is open, you will need to think about how and when the accrual of benefits is stopped.
Is your membership data buy-out ready?
Having high quality and accurate data on members, their dependents and their benefits is important to get a good price from the insurer. It also helps limit your risks of overlooked or inaccurate benefits in future, which can’t always be insured away with indemnity insurance.
Even the best administered schemes do not collect all details required by the insurer – for example most insurers require spouse’s dates of birth (or will otherwise make a prudent, i.e. expensive, assumption). For other schemes, there may be historical issues to resolve. This is the last opportunity for trustees to ensure that every member gets the correct benefits at the right time and they should be confident in every single piece of data.
Carrying out a data audit when you’re around 5 years away from wind-up is a good way to avoid unexpected delays and unplanned costs associated with last minute data or benefit corrections. Pension scheme data goes back decades and there will inevitably be issues that crop up as you go through the process. It’s best to flush these out as early as possible. The actual data cleanse work can then be planned, budgeted and carried out over a period of time.
How to find out how wind-up ready you are
Understanding how wind-up ready you are is an important first step to the process of wind-up. Have a go at our wind-up readiness tool to see how close you are, and what some key considerations might be over the coming years for your scheme’s circumstances.
If you’d like to talk more about winding up your scheme or getting your scheme ready for the journey ahead, please contact myself or your usual Hymans consultant.
Wind-Up Readiness Tool
Try our wind-up readiness tool now!
In just 5 simple steps, our wind-up readiness tool can broadly tell you how close you are to reaching your ultimate long term objective and what the key considerations might be over the coming years for your scheme’s circumstances.