Right funding, wrong investment – most schemes have seen their funding positions improve materially in the past 18 months. The pace of those improvements may have caught many off-guard and their derisking path has not caught up. Trustees need to make sure that investments are aligned to derisking goals and reflective of their current position. Ensure that you are hedging the key risks, that your risk appetite is consistent with your goals and stress test your position. Consider the level of illiquidity in your portfolio and that this reflects your timescale for transacting. Some schemes will have sufficient level of assets to seriously consider a transaction, but an inappropriate strategy to fully capitalise on this opportunity.

Good data, not great data – it is essential that the member data is of good quality and free of basic errors. After all, this data is what the insurers will be pricing. However, it is not essential for the data to be completely watertight and to have full service records on tap. Insurers are capable of taking a pragmatic view on which data is key for an initial transaction, and crucially, what is not. For example, marital data is a must; whereas fully equalised GMP data is more of a desirable. Having all of your member data 100% complete is not essential and should not be a barrier, especially when administrative resources can be at a premium and there are limited resources in the market.

Collaborative over combative – it is really important that you have the right advisers around the table. Prioritise collaborative and pragmatic approaches over those with more of a combative “us versus them” attitude. As trustees, we often act like air traffic controllers, making sure that each plane takes off and lands on time, that they stick to an agreed timetable, and that we manage the key risks accordingly. Your job is made far easier if your advisers are all pulling in the same direction, talking to one another in a peer-to-peer context, using the same terminology, and can be trusted to get on with their tasks, on time and in line with budgets. Finally, you will be working with your advisers long after the first transaction stages, particularly if you are aiming to wind-up a scheme.

Sponsor engagement is key – such transactions will be destined to fail if the sponsor and trustee thinking is not aligned. They both need to agree on the merits of buy-out, as well as the risks, and key issues such as funding (if there is likely to be a deficit) and treatment of surplus (including the use of escrow to avoid trapped surplus). Deals are destined to fail if there are hidden agendas, levels of distrust, or no open dialogues. The sponsor should also be clear on how the transaction will affect their own accounting position and expense lines.

Clarity over simplicity – having a legally signed-off benefit specification is of critical importance. Such a spec needs to be clear and the scheme administrator needs to confirm that it is the basis on which benefits have been administered. So clarity is important. However, we know that insurers are capable of insuring more complex benefit structures – for a price, of course! Complex scheme-specific benefits are not an automatic red flag to proceeding. However, they may pose a hurdle for some of the streamlined processes that insurers have. Trustees will therefore need to clearly articulate why these benefits are valued by members and why they should be retained before they can be factored into any deal.

Remember the user experience – this will manifest in two areas: member communications and the emotional ramifications of concluding a deal.

Members are often seen as the innocent bystanders to such deals and will be informed but not expected to engage. Clear communications are a must, which convey the positive attributes of such a deal from the member perspective. There is also a need to provide reassurance that the level and security of their benefits remain unaffected. We must remember that the typical correspondence members have with insurers will be when trying to renew their personal products or to make a claim; neither experience can be described as overwhelmingly positive! Therefore members may have a level of scepticism when insurers are mentioned in communications.

Trustees are expected to have a great degree of emotional intelligence, but we find that completing a transaction can still be a hugely emotive topic. For some, this can result in the culmination of years of discussion and represent successful completion of a project. For some, it may be an end of their role, for example as pensions manager or trustee, and call time on their working relationship with colleagues. There may also be conflicts to be managed and stakeholders should consider using independent parties or working groups for more effective decision making.

Is insurance the answer? – a buy-out solution with an insurer has long been seen as the ‘holy grail’ for most schemes. And, to be clear, a transaction with an insurer to cover members’ benefits is still a very good outcome for members, trustees, and sponsor alike. The goal of buy-out has been drilled into them for years and their endgame was typically so far away that there was no serious discussion to consider if there were more appropriate alternatives. In addition, there was muted enthusiasm from the wider market to consider alternatives with a very limited supply of credible options.

However, the advancement of schemes’ journeys, emerging surpluses, and initiatives from advisers and governing bodies has opened up a much wider and welcome debate on the endgame for pension schemes. Conversations around run-off or consolidating ‘super funds’ to support UK economic growth are certainly interesting concepts.

Whilst this is a positive development, it must be noted that significant changes rarely happen quickly in pensions (think back to how long it took GMP equalisation to fully emerge, or CDC). Aside from obvious logistical and political challenges, several parties involved in such discussions could also have conflicts from vested interests. A buy-out is still likely to be the best outcome for a scheme for their circumstances, but the lesson for trustees and sponsors is that it isn’t the only solution.

Alan Greenlees – Client Director at ZEDRA