Avoid the queue: your fast-track pass to buy-out
31 Jan 2018 - Estimated reading time: 5 minutes
As Christmas begins to feel like a distant memory I was reflecting on all the good times had with colleagues, family and friends over the festive period. What’s not to love?! Well there was one thing….
Like many, I got caught up in the last minute rush to finish my Christmas shopping. The stress of fighting through a sea of possessed shoppers, the disappointment of missing out on the presents I really wanted and then the frustration of spending more for an alternative. While I currently work on a number of risk transfer projects with my clients, I couldn’t help but draw parallels between the Christmas shopping rush and the pension buy-in market. Ok, so it’s not immediately obvious what the parallels are but bear with me on this one….
Risk transfer is a key focus for many Trustees, our recent Trustee Barometer survey suggests over a quarter of Trustees are targeting buy-out as their ultimate goal. But for many Trustees there is a funding gap to bridge before this is possible. Over time this will result in many schemes rushing to insurers to secure their liabilities. But with insurers’ capacity to take on this business limited, we will find ourselves with a capacity crunch, as the demand for buyout policies out weighing insurer capacity. Somewhat like the rush I witnessed in search of the perfect present on Christmas Eve!
On reflection, the solution to my problem is easy. Plan ahead and act early to avoid the stress and the poor outcome. But what can Trustees do to avoid being caught in the capacity crunch and running the real risk of not being able to secure members’ benefits? The answer is simple and familiar – plan ahead and act early!
So what planning should you be doing now? The first simple step if you’ve not done it already, is to agree your target buy-out date at your next strategy review. This will allow you to put the building blocks in place. Next, act early to get yourself “buy-out ready” and to the front of the queue with insurers. Here’s a few actions which will help:
- Engage with insurers now – sharing your data with insurers now will make the buy-out process more efficient. Insurers will favour schemes they are familiar with.
- Consider member options – offering pension increase options to members can make the benefits more attractive to insurers. This makes it easier for insurers to hedge their risk. Also, transfer value offers will settle liabilities more cheaply than securing insurance to help bridge the shortfall.
- Data cleansing – completing GMP reconciliations, collecting spouse existence data and determining spouses’ pension amounts on death of pensioner members makes life easier for insurers. Giving insurers an easy life will move you up their pecking order.
- Buy-in – consider a series of strategic buy-ins to reduce some risk when the opportunities arise and to develop relationships with insurers. If insurers know you, your data and your benefits you will be their favoured customers.
Here’s a typical timeline to illustrate the steps you can be taking now and in the lead up to your target buy-out date.
Not only will this help you get to the front of the queue, it will also spread the financial burden on your sponsoring employer. If buy-out is your target, you’re going to have to take all of these steps at some point - why not do it in a managed, well-budgeted fashion?!
In fact, as demand begins to outweigh supply, the cost of buy-out will increase. So much like taking advantage of the pre-Christmas sales; monitoring the buy-in market for attractive pricing now could result in a significantly better deal.
If you want to know the latest on the buy-out market have a look at our recent risk transfer report. Or if you’re not sure if your scheme is ready for a buy-in yet, find out in just 4 simple steps through our buy-in readiness tool.
What’s more, on 22nd February we’re hosting a seminar on DB scheme consolidation, a topic which is gaining momentum and interest from the wider market. Scheme buy-out will be one of many forms of consolidation covered in what is sure to be an extremely interesting session. You can find out more about the event here. I look forward to seeing you there!