Like clockwork: the ideal smaller scheme transaction
4th May, 2021
After completing a very large number of bulk annuity transactions acting as strategic adviser and broker, I am soon to complete my first buyout as a professional trustee. I suspect that, in the same way as I still remember my first ever transaction (20+ years ago, when buy-ins did not exist and buyouts were very rare indeed), this first project as a professional trustee will linger in my memory too.
First thing to note is that this is a smaller transaction, in the sub £20m space. As such, it won’t attract big headlines in the pension press, even though the increase in security achieved in respect of members’ benefits is just as important as for a larger scheme. In addition, the family-owned sponsoring employer will achieve a significant reduction in risk and volatility following the transaction, and will be able to concentrate on running and growing their business.
Prudent funding and good governance over the years mean that this is a solvent buyout. As funding has improved, the trustees have been able to gradually de-risk the scheme assets, moving to a more closely matched position against insurance pricing in December 2020 in preparation for a market approach in the new year.
A significant amount of data cleanse work was done in advance, in recognition that this would produce a more precise premium and would make the scheme more attractive to the insurance market. The sponsor is fully behind a transaction and engaged with the process – an informal joint working group has participated in various calls, first to agree a plan for the exercise, and later on to discuss the progress made after each stage.
Considering the above, it is not surprising that we did not struggle with insurer interest once we were ready to approach the market in February 2021. Given the small size of the scheme, we selected an insurance partner in advance, taking into account both their strength as counterparty for a transaction and the expected terms they would be able to offer. We set this out as a one-round process, with the insurer being given clarity on the terms we were looking to achieve, which were challenging but fair. Understanding market dynamics at any given time will give comfort to trustees and sponsors that terms can be properly assessed even in a non-competitive process, and will enable schemes to follow a streamlined, more efficient broking process while still being able to tap into advantageous market terms.
One other feature of this transaction is that we will be using pre-negotiated contractual terms with the selected insurer. This provides additional reassurance that we have secured the best terms possible for our scheme (as pre-negotiated terms have a number of more attractive features than an insurer’s standard contract) and essentially guarantees that we will be able to transact in under two weeks. This is valuable, although the price lock negotiated with the insurer is a good match against the scheme assets and gives significant protection against adverse market movements.
The process to disinvest the assets is ongoing alongside the other preparatory work, and we expect a transaction will be completed in early May 2021. This is around 12 weeks from our initial market approach, which is a great result given that we were ready to grant the insurer some flexibility on timescales if needed to help with their appetite for the scheme – in the end we did not need this.
A small transaction that runs like clockwork (as it should) will also reassure insurers that they should continue being active in this space, helping members, trustees and sponsors of other schemes with the same settlement endgame objective – this is great news, as there are many of these around!