Improvement in funding has been seen across almost all schemes, but the most significant improvements have been in less well hedged schemes who have benefited from the rising interest rate environment.

Based on our own pipeline of cases we expect the number of schemes trading with insurance companies in 2023 to be a threefold or more increase on last year.

With such a seismic shift in demand we want to dispel some myths and provide tips for schemes looking to approach the insurance market.

Absolutely untrue. We are currently helping 8 schemes with assets less than £10m, 2 of which have less than £1m of assets. All of them have received quotations.

Maybe. We are seeing appetite from more than one insurer to trade with smaller schemes and are aware of other insurers expressing an interest given the large number of smaller schemes now ready to trade. Working exclusively, if approached in the right way, can enable a scheme to get attractive pricing and critically to execute the transaction quickly, ensuring a good outcome.

No. It’s key to differentiate between getting a buy-in (trustee investment decision) versus buyout (conversion of a buy-in to individual insurance contracts). A buy-in, if a scheme is well prepared, can happen beginning to end in a couple of months. The conversion to buyout does typically take many months following a buy-in, but all the key risks are passed from scheme to insurer at the buy-in stage.

Maybe. Let’s look at preparation in more detail.

Here’s our checklist to help get prepared:

Data: No arguments, having accurate data you have confidence in is important. But it’s also key to understand which data makes a difference to how insurers price and which are more administrative in nature. Price sensitive data needs collecting, if missing, and ensuring it is accurate. Administrative data also needs collecting and improving, but the latter you can transact a buy-in without and work on during the buy-in to buy-out phase. You can also be smart in the way you approach improving data. For example, using a tracing agency for certain data items is low cost, accurate and in our experience much faster than going directly to members.

Benefits: This is almost identical to the comments made on data. I’d suggest getting your administrator to draft an insurer friendly benefit specification based on how they administer the scheme. Then get your scheme lawyer to review this against the trust deed and rules. Take care of the big-ticket items that can trip schemes up, like ensuring that accrual and Barber equalisation have been dealt with correctly. Work with you lawyer, and an insurance expert, to consider the discretions the trustees have in the rules and how these will be codified when insured.

Get a robust estimate of the likely premium for a buyout and make sure you understand all the costs of buying out, and the future savings, so a proper decision can be made between trustee and sponsor on the viability of a buyout. Use a specialist risk transfer adviser to either estimate or source an indicative quotation to ensure this is robust, and where possible make sure it is based on up-to-date data and not stale valuation datasets.

Getting a buyout done successfully is a bespoke project – it is not business as usual. Therefore, get it set up formally as a project with trustee and sponsor engagement. Consider how decisions will be made – is a joint working group of sponsor and trustee likely to help? Would the trustee board benefit from a professional trustee for such an important project? Are the incumbent advisers the right firms for the job – would some independence add value?

As I showed at the start of this blog, buyout has come towards schemes much quicker than expected, and as such schemes journey plans have generally shortened considerably. This means schemes may hold some less liquid assets, making trading insurance trickier. This is almost always solvable, but it is critical to engage with your risk transfer adviser and investment advisers early in the buyout project so all avenues can be explored.

With demand now at an all time high, and only likely to get higher, in addition to all of the above trustees, and probably more importantly their advisers, need to consider the way they approach insurance transaction. There is a risk that human resources become the constraining factor to how many scheme members get to the security of an insurance company, so it is irresponsible for advisers to be running and constructing highly resource intensive processes. 

 

Adam Davis, K3 Advisory