Understanding the insurer decision-making process and what drives their triage is crucial for trustees and sponsors to secure the best deals for buy-in and buy-out transactions. At our ‘Endgame Solutions Conference,’  I chaired a discussion on how to do this alongside fellow industry experts: Pete Jennings (Just), Adrian Somerfield (L&G), Costas Yiasoumi (formally WTW, now Royal London) and Adolfo Aponte (Cardano).

Exclusivity versus the competitive process

There are two main paths for buy-in/buy-out transactions: exclusivity or a competitive process.

Trustees typically prefer a competitive process as it offers a clear market view and reassures sponsors. However, exclusivity can be valuable, particularly for smaller schemes as I discussed in my case study for a £0.5m transaction. For insurers, exclusivity provides greater certainty, enabling them to allocate more resources to the transaction. Additionally, if a buy-in has been completed with an insurer, then there can be benefits to partnering with the same insurer again in the journey to full buy-in and ultimately buy-out.

Exclusivity insights

Insurers’ views on exclusivity differ, with some more likely to request it than others, particularly for mid-sized schemes. Positioning your scheme appropriately and engaging with insurers will help you gain traction. Leveraging the trustee’s position as non-forced buyers can help create pricing tension in an exclusive process.

Risk transfer consultants are pivotal! In an exclusive process, the consultant supports the trustees and scheme sponsor to define clear objectives, such as what success looks like, and what role the insurer plays in achieving these goals. A clear steer on how any potential transaction is priced against other deals the consultant has advised on is key when you don’t have a comparator price.

You should always consider the non-financial aspects that are important to you before selecting an insurer. A desktop review can help identify priorities, such as transaction speed or handling unusual benefits, and address issues like administration and counterparty risk upfront. Obtaining detailed information from the insurer can allow for effective benchmarking by the consultant.

Understanding Insurer processes to get the best deal

Insurers prioritise cases that they believe they are likely to win. Exclusivity can quickly elevate a scheme’s priority in the triage process as it brings certainty to the insurer. For large schemes, partnering with an insurer can provide transparency and comfort to trustees, sponsors, and members. For smaller schemes, timing and flexibility are crucial to ensure the insurer’s capacity both pre and post-sale.

Risk transfer consultants must be thoughtful and flexible. Handling a ‘Request for Proposal’ (RFP) that deviates from the norm can be complex for insurers. But it also allows them to demonstrate innovation.

Getting the RFP right straight away is essential, as unnecessary legal requests later on can significantly impact quotes. Streamlining the process to a single round on a best-and-final basis can yield better quotes than a prolonged, multi-round approach.

It’s crucial to focus on what matters. The standard contract will work for most schemes with little to no allowance for tweaks. Larger transactions will involve negotiations and be more tailored to the specific deal. Ensuring trustees only request what’s necessary in the first stage maximises engagement from insurers. Trustees should avoid overburdening the insurer with governance requirements and instead, seek commitments without adding unnecessary complexity.

Guaranteed Minimum Pension equalisation (GMPe)

It’s important for pensions trustees to drive GMPe forward. However, insurers have been unclear about whether GMPe should be addressed before or after a transaction. Many insurer processes are designed to consider GMPe during the buy-in to buy-out data cleanse stage. If GMPe is already completed, it can challenge pricing models. But insurers are now working on integrating GMPe into their upfront quotes to provide certainty to schemes, a process expected to take 6-12 months. Trustees looking to transact should know how GMPe will be handled post-buy-in, But they shouldn’t be perturbed from moving forward with any GMPe projects. Ultimately, it’s the duty of the Trustee to pay the correct benefits to members.

Illiquid Assets

Balancing value for money and transaction certainty for illiquid assets in a pension scheme’s portfolio can be challenging. However, as the Boots transaction showed (where a solution was found for £1.2 billion of illiquids within months), there’s been significant industry progress in managing these types of investment.

Trustees should start their due diligence early, consider tax implications and other factors, and be prepared to explore various solutions like secondary brokers and parallel processes. The market has seen innovative approaches, including company loans to trustees, insurers taking illiquids, and deferred premiums. Illiquids are no longer the impediment they were 18 months ago. However, impacted schemes should ensure they have a clear strategy to exit these, and planning is key to solving this.

What changes are coming down the line?

There’s potential for second-round triage processes, necessitating clear feedback from consultants to enable insurers to proceed. Trustees must map out every step, which is where a professional trustee can add significant value having been through the process on multiple occasions. Insurers review pipelines weekly or even daily, and advisers must make sure insurers are kept well-informed on expected timescales and are prepared to be involved in the process.

Key Takeaways

To secure the best deal and successfully transact, we highlighted the following key takeaways:

• keep the process simple
• focus on what matters (objectives and desired outcomes)
• follow through on commitments
• provide as much warning as possible
• maintain open communication throughout
• remember that the triage process is a human process!

By understanding and aligning with insurer processes, trustees can navigate schemes through the complexities of buy-in and buy-out transactions effectively. No one approach will work for all schemes so flexibility and experience of completing transactions in different ways is crucial for trustees to secure the best deal for their members.

If you would like to discuss any of the topics raised above, please contact James Duggan or one of our Endgame Solutions team.