Is your scheme buy-out ready? 10 questions to ask

With improved funding levels, many trustees are looking at the possibility of a buy-out, says Phil Kelly, a Pensions Actuary at First Actuarial.

Higher funding levels will improve your scheme’s prospects of a buy-out, but is that enough? Here are 10 questions to ask:

  1. Is buy-out affordable?
    Ask your Scheme Actuary for an estimate of the buy-out position. Some insurers will provide indicative pricing. If you have a buy-out deficit, can your sponsor plug the gap?
  2. Is buy-out the right option for your scheme and members?
    While your members will benefit from a secure pension following a buy-out, any chance of future discretionary increases will be lost. Consider alternatives, such as other investment strategies or running the scheme on.
  3. Is your sponsor on board?
    Many sponsors like the idea of a buy-out to remove their pension risks but may not be as keen on the costs involved or the loss of a possible future refund. Start discussions with your sponsor at an early stage.
  4. Are your data and documentation ready?
    Do you hold complete and accurate member information? Has your benefit specification been signed off by lawyers? Insurers are unlikely to engage with your scheme without this.
  5. Have you got the right advisers in place?
    You’ll need experienced advisers with specialist expertise at every stage. Insurers will also consider your advisers and their track record before deciding on whether to quote.
  6. How flexible are you?
    In the current busy market, there’s no guarantee you’ll get a quotation when you want one. If your timescales are flexible, you’ll be at an advantage. You may also need to agree exclusivity with an insurer to get a formal quotation.
  7. Is your governance ready?
    Getting your governance processes in order is important as insurers expect quick decision-making. Your project plan should set out the key decision points and who needs to be involved.
  8. Are your investments ready?
    In the run up to a buy-out, your investments should be in ‘insurer-friendly’ funds, which trade regularly and are likely to broadly match buy-out pricing.
  9. Do you have a member communications strategy?
    You should agree how you are going to communicate with your members and how often. And make sure your member communications are positive; buy-out is a good news story.
  10. Are you on top of the legal aspects?
    Get lawyers to advise on the buy-out provisions in your scheme rules. You’ll also need legal advice at various points along the way. Trustees and sponsors need to work together to achieve a successful buy-out. Having the right advisers on board and being ready to transact with flexible timescales will put your scheme in a strong position for insurer engagement.

This article originally appeared in the October 2023 issue of Pensions Aspects.

Any questions or comments about this article?

Get in touch with the author, Phil Kelly.

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