Where do your Views Really Come From?
14th May, 2021
So you’ve decided to buy out. How will you get the right advice?
The bulk annuity market is projected to be buoyant over the next decade, with Covid-19 being just a bump in the road. Some forecasts predict around £40bn of transaction per year, each transaction attracting a hefty fee for the advisors involved. Unlike traditional ongoing pensions advisory (where a valuation is conducted every three years), once a transaction is complete, the money is gone and with it, the opportunity to correct any missteps.
Which team do you bat for?
Some consultancies advise both the corporate and the trustee in a transaction. While the two advisor teams may be conflicted with regards to the transaction, being employed by the same firm, they are aligned with regards to commercial interests. Therefore, despite appropriate management of the flow of confidential information, trustee boards in this situation still need to be mindful about corporate interests masquerading in the advice they receive. This is especially pertinent if corporate interests is a large revenue driver for the consultancy concerned. Of course, the reverse also applies when trustee interests is what drives revenue.
So it’s not just a question of conflict management between the trustee and corporate teams. There is a third team playing – consultancy.
A different kind of unconscious bias
There is no doubt that experienced advisors come with a wealth of knowledge of the market and have successfully navigated other schemes through a transaction. That is valuable. Trustee boards not familiar with transactions will rely on these experienced advisors to educate, advise and support. Through this process, like a teacher, the advisors provide the trustee with a paradigm through which to view the market. An affinity for a certain approach or provider would not be expressed on paper, but may well be expressed in conversations, and may not be so overt as to immediately be recognised as a conflict. For starters, any gift or hospitality given by a provider to a consultancy is only declared to the consultancy itself and not to the trustee boards.
What can trustee boards do?
We hear the word “diversification” often, and this is where a certain kind of diversification can benefit.
Diversification of advisors
Trustee boards of some schemes appoint advisor panels, although this is more typically seen with legal advisors than actuarial or investment advisors. Without mentioning the potential commercial and technical conflicts between advisors, the cost and practical implications of this option mean it is viable only for the largest schemes.
Diversification of trustees
Trustee boards can access some of the above diversification through the use of an independent trustee; preferably, an independent trustee with deep experience of bulk annuity transactions, who has a broader view of the market and can bring their own expertise to the discussion. This trustee can bring with them first-hand experience of working with various advisors and providers, and can support the rest of the board in challenging the paradigm and approach offered.
Therefore, when considering a transaction of this type, trustee boards should ask themselves whether they already have the knowledge and experience to understand and adequately challenge their advisors, or if having a seasoned independent trustee would be beneficial.