More schemes than ever have signed buy-in contracts - reducing the risks of the pension scheme to the scheme members, trustees and sponsor significantly. This is a good thing.
However… it can be tempting to think that signing the buy-in contract signals the end of a bulk annuity project. In reality, the post buy-in phase requires just as much, if not more, thought than the buy-in contract, and will likely take significantly longer. So, it is worth carefully considering this key phase sooner rather than later.
Buy-in to buyout phase
A buy-in to buyout phase is necessary for most schemes. It ensures the insurer holds accurate data for every member of the scheme, or part of the scheme, being insured for example to check and confirm dates of birth and addresses held are accurate. It is also common to complete GMP equalisation and tidy up other small data or benefit discrepancies in the data cleanse process, ensuring signing the buy-in contract is not delayed for issues which, ultimately, make minimal difference to the insurance premium.
What happens in the post buy-in phase?
A key task for most schemes in the buy-in phase is GMP equalisation, which needs to be completed prior to issuing individual policies to members. The majority of schemes will also have other data issues needing to be sorted, such as pension amounts for contingent spouses.
For most data issues, the heavy lifting lies primarily with the schemes’ administrators. This has caused something of a capacity crunch in the market with administrators undertaking these clean-up projects in addition to the day-to-day tasks of the scheme.
Insurers will also be facing similar capacity issues, having to typically deal with managing more schemes in data cleanse than in previous years.
What can be done to help ease the problem?
If a DB pension scheme’s long-term objective is to complete a full buy-in or buyout then they should be thinking about the work as soon as possible. Some key points to consider are:
- Project management – having an independent project manager could, potentially be the single biggest factor in determining how smoothly the data cleanse runs! It is a complex project with many stakeholders and many moving parts - project management may be available through your buy-in broker.
- Data – the preparation for this can be started ahead of time, for example marital status, bank account details for members etc.
- Legal review of the benefit specification, which can often uncover data and benefit issues.
- GMP equalisation – this is a large piece of work requiring data work as well as legal and actuarial advice. The sooner this is started, the better.
Resolving these issues prior to seeking buyout quotations will help make your scheme more attractive to insurers, increasing the likelihood of achieving quotes, and could even help with receiving attractive pricing as insurers will be keen to transact with schemes with cleaner data and benefits.
Risks to the trustees
Completing the data cleanse in a timely manner is important for several reasons:
Costs – each month that a data cleanse is still in progress is another month that the trustees will be paying advisors fees. Therefore, completing the data cleanse and winding up the scheme as soon as possible will avoid these additional fees.
Keeping within contractual agreements – a data cleanse length will be agreed as part of the contract with the insurer, with a typical period being 12 to 18 months. Once this period has expired, insurers will usually have various rights. For example, it is common for an insurer to have the right to complete the data cleanse themselves, at the trustees’ expense.
It’s natural when completing a major project, like a buy-in, to take a breath, but it’s critical to get the buy-in to buyout phase moving. The good news is with good project management you can give yourself a good head start even before signing the buy-in contract.
Andrea Mendham, Partner, K3 Advisory
