WIND UP MYTH BUSTERS SERIES
Myth 4: I’ve done a buy-in so I know what I’m doing
25 Nov 2021
Buying out all scheme liabilities and winding up the scheme is often the hardest job a board of trustees will ever be faced with. We hear a number of myths and rumours flying around, from trustees, pension managers, companies and even consultants who specialise in other areas!
In this series, we aim to bust those myths and promote a better understanding of the journey to wind up a scheme. The series continues with:
Myth 4: “I’ve done a buy-in so I know what I’m doing”
So, you’ve just completed a buy-in transaction – sounds like a call for a celebration! But it’s not time to take your foot off the gas just yet… Even after a scheme has insured part or even all of its liabilities, there can still be a long way to go on the road to securing a buy-out and being able to ultimately wind up the scheme. Here, we cover the key stops, as well as some potential roadblocks, to take you from buy-in to your final destination of wind up.
Scheduling data cleansing work can be broken down into three key stops; pre buy-in, post buy-in and buy-out readiness.
Before going to market, most schemes will have already carried out some high-level checks on the completeness and reasonableness of their data (for example, checking no one is listed 200-years-old), collected marital status information and performed tracing exercises. Following the signing of a buy-in contract, the scheme will typically have a period of 12-18 months to cleanse the data, with an associated adjustment to the insurance premium. At this point, we would expect schemes to correct any data issues found as part of the pre buy-in checks, and checks carried out by the insurer (for example mismatches between service dates and tranches of benefit). Any work not carried out before the buy-in transaction will need addressing now.
After completing the above review and implementing any changes, it’s easy to think that you’re done. If you’re preparing for buy-out and wind up, however, you’ve got another mile to go… This is your absolute last chance to make sure that all benefits and data is correct, and so an even more thorough data ‘MOT’ is required. We recommend going back to the drawing board and calculating benefits from scratch for a sample of members – this will help reveal if any historic or systemic issues have distorted the data. It’s also good practice to write out to the members and ask them to confirm their details and benefits that you hold for them.
Careful planning in advance will help ensure that cleansing is comprehensive, giving trustees confidence in the data and benefits. Any unknown data issues that arise have the potential to increase the insurance premium and block project progress - incurring considerable costs and time spent in dealing with them.
AVCs and DC benefits
If your scheme has any attaching DC or AVC benefits, these must be discharged before the scheme can proceed to wind up. It’s well worth planning this part of your journey in advance and finding out if your chosen buy-in insurer can take these on as part of your transaction. Otherwise, these benefits must be transferred to another scheme, for example a Master Trust, bought out separately in a Section 32 policy, or assigned to the members’ own names. Planning and investigating options early on will help avoid the potential roadblock of missing out on a cost-effective solution. No matter what route you choose to take, careful member communications are needed to keep members in the know with what’s happening with their benefits.
Often schemes lack the up to date paperwork and records to go alongside their historic individual annuities – this can form a major roadblock on the journey to wind up. Like AVC benefits, historic annuities must also be discharged before you get there, and so schemes may need legal help to locate and discharge policies.
Guaranteed Minimum Pension (GMP) projects
A complex issue affecting the majority of schemes, GMP issues have the potential to stall progress on any wind up project. Many schemes are now coming to the end of their reconciliation projects, and are rectifying records to align with HMRC values before moving to equalise men and women’s GMPs. Planning ahead is vital here – joining up data cleansing work with any work needed to ensure you have the necessary data for GMP calculations can save both time and money by avoiding going down the same road twice. It’s also worth planning out your communications to members, who’ll undoubtedly prefer to receive a small number of letters telling them everything they need to know, rather than numerous letters telling them something different each time – leading potentially to confusion, queries and complaints.
Winding up lump sums
Members with relatively small benefits may be eligible to take these as a winding up lump sum; a one off cash lump sum may have more value to some members than a small monthly pension. While it’s not mandatory for Trustees to offer this, it’s well worth pausing at this checkpoint to carefully consider the merits and drawbacks. For some schemes, the added flexibility for members may outweigh the costs and administrative burden of running the exercise.
Rules and benefit specification
As you approach your final destination and the scheme takes out a buy-in policy with an insurer, trustees hand over the benefit specification to use as their instruction manual. Insurers will not see the Trust Deed and Rules, and so it’s vitally important that the benefit specification includes everything that is necessary to run the scheme as you would. It goes without saying that this document must be thoroughly reviewed; by the administration team to ensure that it includes any current practices which may differ slightly from the rules, by the legal advisor and the trustees to ensure it hard-codes any discretions that the trustees want to apply.
Trustee Indemnity Insurance
Once you’ve reached your destination and the scheme is about to wind up, there is one final arrangement for trustees to make. Even after all benefits are fully bought out, trustees will be exposed to some risk from the scheme, for example claims arising as a result of data errors, errors in the benefit specification and previously unknown members claiming scheme benefits. Trustees should carefully consider early on in their journey whether they plan to take out any insurance to protect themselves against such claims and associated legal costs. One of the final tasks before the journey’s end is to put in place the chosen protections, be that insurance or an indemnity agreement.
Having insured all liabilities by way of a buy-in is a great position for trustees to be in, however there is still more work, time and costs required to ultimately wind up the scheme. Understanding the remaining key projects is crucial to developing a cohesive project plan to steer you from buy-in to buy-out and on to ultimate wind up as cost-effectively as possible, helping to minimise the bumps in the road.
If you’d like to talk further about your scheme’s journey to wind up, please get in touch.