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Survey Report

Planning for a pension scheme buyout

De-risking report 2024

By Katherine Russell , Melissa Wong and Alice Fletcher | January 24, 2024

The bulk annuity market has seen an increase in full scheme buy-ins, which is a significant milestone for any pension scheme. However, there are still lots to do before the buy-in is converted to a buyout and the pension scheme can be wound up. Katherine Russell, Melissa Wong and Alice Fletcher highlight the key steps and considerations following a full scheme buy-in.
Retirement|Pension Board and Trustee Consulting|Pensions Corporate Consulting|Pensions Technology

It often surprises sponsoring employers to understand that the typical timeframe for a scheme to move to buyout and wind-up following a full scheme buy-in is two to three years. This is particularly true for US sponsors if they have experience of undertaking a similar exercise for their US plan where the process is often much quicker.

Whilst some of the tasks, and timeframes for completing them, will vary between schemes and the preparatory steps that were taken prior to the buy-in, there are three key themes that are relevant to all schemes as summarised below. Additional considerations for buyout are covered elsewhere in this report – such as in relation to considering options for any residual illiquid assets which were not needed prior to buy-in, as discussed by Gemma Millington, and considering options for residual risks, as noted by Sadie Scaife.

Project management

The move to buyout will be the most important and complex project most schemes ever undertake, particularly given the number of stakeholders involved, and appointing an experienced project manager can be very valuable. The Pensions Regulator recognises this in its guidance to trustees: “We would regard it as good practice for trustees to consider appointing a person to act as project manager to drive the wind-up process forward.” (Source: The Pensions Regulator, October 2012).

It is good practice for the project manager to take overall responsibility for driving the project forward, manage the timeline and critical path, ensure key stakeholders and decision makers are fully engaged and managed and that all are on board to deliver key milestones on time and on budget.

They can also take a holistic view to planning all workstreams, and provide guidance to the stakeholders on the sequence of work and priorities. This will be particularly important given the administrator’s key role in the move to buyout, the importance of them being able to maintain business as usual activity and the pressure most administrators are under at the current time.


Onboarding, data cleansing and transfer of administration and payroll

The quality and accuracy of a scheme’s data is fundamental in ensuring the correct member entitlements are bought out – it’s now or never! Buy-in contracts allow a data cleansing period of typically 18 months to two years following the execution of the buy-in, with time subsequently for the insurer to review the data, raise any queries and calculate the balancing premium.

The insurer will allocate a transition manager to support the trustee through the onboarding, data cleansing and administration handover processes. They will use tried-and-tested processes and will be in regular contact with the administrator, project manager and other stakeholders throughout.

The first step following the completion of the buy-in is to ensure that the administration team sets up its processes to comply with the insurer’s requirements, for example in relation to monthly membership or payroll reconciliations and the processes for member calculations for transfer values or retirement quotations.

Once this is completed, which typically takes a couple of months, the data cleansing process can begin. The steps involved in cleansing the data will depend on the status of the data but typically include:

  • Completion of GMP equalisation exercises including obtaining or verifying data needed in relation to the equalisation of historic transfer values
  • Undertaking data verification or rectification exercises – a common rectification exercise is in relation to the calculation of contingent spouses’ pensions for current pensioners as these are often not held on members’ records and only calculated on the member’s death
  • Carrying out mortality screening exercises and undertaking member address tracing exercises
  • Ensuring member records are digitised so that data is not held in administration systems’ notes, for example, and is easily accessible for the transfer of administration
  • Final review of the benefit specification to ensure it accurately reflects the benefits to be insured.

Once this is completed, a final set of data and benefit specification are shared with the insurer, and any balancing premium is calculated and paid. The process for transferring the pensioner payroll and the wider administration to the insurer will then commence. This process will itself take several months with time built into the project plan to allow for shadow runs of the payroll to be done by the insurer for a couple of months before they go live.


Member and stakeholder communications

The move from buy-in to buyout can be unsettling for members who may have limited or no experience of what the change means and who the insurer is. It is therefore crucial to have a thorough communications strategy to mitigate the risk of member uncertainty, dissatisfaction and resistance to change, as well as provide the necessary information to comply with regulatory requirements.

Throughout the journey, it’s important for members to receive the correct information that’s relevant to them when they need it and with the complex issues explained in a way that they can understand. Consideration should also be given to different membership groups, where non-pensioners will need more focus around their retirement options.

The communications strategy will need to be tailored to the specific circumstances and to align with any particular requirements of the chosen insurer. For illustration, a sample communications plan has been included in the PDF which can be downloaded by completing the form on the right of this web page, or below on a mobile device.

Key considerations in relation to communication strategy:

  • Different members may have different needs and require different support – it’s key to think about the specifics of your membership (e.g. age profile) when planning the style and method of communications to make it as inclusive as possible. We have developed a suite of tried-and-tested member communications for our clients to use which have received very positive feedback from scheme members.
  • Change never happens in isolation so it’s important to consider what external factors may affect member needs and reactions
  • Nothing fills a vacuum like rumour, so keep all stakeholders updated as you progress through the journey to wind-up.

Does it have to take two to three years to move from buy-in to buyout?

We have supported schemes who have moved from buy-in to buyout much quicker than this. However, as noted above, there is a significant amount of work that insurers require schemes to have completed before moving to buyout and for trustees to feel comfortable that they have insured the right benefits for members. A strategic plan in relation to data cleansing prior to buy-in can really help to ensure a smoother path to buyout and the use of a specialist team could ease the burden on the administration team.

More recently, it has become more challenging to move at speed given the busyness of the market and resource challenges for both insurers and pension schemes, particularly their administrators. Having said that, given the growing trend of full scheme buy-ins, we may see innovation to help schemes achieve buyout more quickly - watch this space!

A legal adviser’s view

Susie Daykin

Partner, Travers Smith

Susie Daykin, Partner, Travers Smith

Susie Daykin, Partner at Travis Smith who WTW has worked with on several buyouts has shared her thoughts on the additional legal issues to consider as part of the move from buy-in to buyout:

  • It is important not to forget about the detailed legal provisions that were negotiated at the time of entering into the buy-in contract, sometimes many months or years prior to being ready to move to buyout. The contract will contain the minimum data cleansing steps the Trustee must complete before making a buyout request as well as the confirmations that the insurer will want to evidence this. Other requirements may cover what notices need to be given to members and when, and what steps need to be taken in relation to the transfer of administration records. Moving to buyout will be a more efficient process if these requirements have been front of mind during the data cleanse process itself, both to ensure the contract requirements have been fulfilled, and so that relevant data cleanse completion reports or assurances can be provided in a manner that meets the Insurer's requirements.
  • The sequencing of moving to buyout is something that sponsors in particular should think about at the beginning of any project. Both sponsors and Trustees should make sure they understand at the outset the respective balance of powers in relation to terminating and winding-up the scheme, recognising these can be two different actions. Any commitments or changes in powers that the sponsor wants to request from the Trustees as part of the project should be obtained before the buy-in contract is entered into, especially if the sponsor is providing additional funding to facilitate the insurance transaction. Reaching agreement on the principles for using any resulting surplus should also be thought about at this point.
  • If there is any surplus, then the buyout plan will need to factor in complying with various legal requirements that apply before this can be distributed, including notifications to members and the Pensions Regulator. Legal advice will be needed as to the best way of complying with these in the relevant circumstances.
  • A final thought on GMP equalisation and interactions with buyout timing. Insurers may be prepared to implement GMP equalisation after buyout, but this is only legally possible where equalisation is on a dual records basis. Under the GMP conversion legislation, only trustees have the requisite powers to effect GMP conversion, and not insurers. Insurers' appetite to complete dual records equalisation post buyout is likely to depend on the specific circumstances of the transaction. There may be more flexibility here for the larger schemes who have the greatest ability to negotiate bespoke terms. Again – this is something to agree at the outset of the buy-in process and ideally as part of the terms on which prospective Insurers are asked to provide quotes before exclusivity is awarded.

Director, Transactions

Melissa Wong
Senior Director, Pension Project & Data Solutions
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Alice Fletcher
Associate Director, Project and Data Solutions

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