Risk Transfer TV - In conversation with Ramona Tipnis, Client Director at PTL

Paula Haughton: Hello. Welcome to Risk Transfer TV. I'm Paula Haughton and today I'm here with Ramona Tipnis of PTL.

My first question is why should trustees start to prepare for buy-ins so early?

Ramona Tipnis: You need to start as soon as buyout is agreed to be the ultimate target. There is a significant amount of work that needs to be done to ensure that the data is clean, rectified and reconciled. The data also needs to tie in with the benefit specification, which in turn needs to be reviewed and updated to remove any ambiguity that might have crept in over the years. This is not just about deferred members. All past transfers out also need to be reconciled to ensure the correct benefits have been paid or that there is an appropriate amount of insurance in place. While some of this can be done once a bulk annuity policy has been purchased, doing so could result in uncertainty over the final pricing and a further 18 to 24 month long delay to agreeing the final balancing premium and completing the buyout. It will also help to make the scheme more attractive to insurers.

Completing a good proportion of this work beforehand will not only increase the interest from insurers, it could also reduce the time taken to receive a quote and complete the buyout while also helping with pricing. I would say that schemes are already grappling with a number of these issues and a lot of this work would need to be done whether or not buyout is a long term objective. Trustees might also want to consider their scheme's investment strategy. It would be unfortunate to get to a position whereby the funding position has been achieved, but some of the assets are locked in a duration that extend beyond the target buyout date.

Member communication is also vital. As trustees, we are always warning against scams. We don't want a communication about the buyout to be dismissed as such. So starting the communication at an early stage and keeping the dialogue open will help to reassure members because without member input, we can't always fill the missing data fields.

And finally, be prepared for the unexpected. Often issues with the data or benefits will arise and these need to be resolved in time.

Paula: To what extent should the sponsor be involved?

Ramona: It is a sponsor who is ultimately funding the buyout. No matter how well prepared trustees think they are at the start of the buyout process, there will inevitably be a number of issues that crop up that might have financial implications for the sponsor. Aside from the unknowns, the sponsor should also be made aware that the scheme will need to be run on for a period after the bulk annuity policy has been purchased and until the buyout has been completed. This period is also a period of higher costs as trustees complete all of the actions required. There will also be points where the trustees require the consent of the employer to agree to changes to benefits or augmentations, for example. So keeping the sponsor updated is crucial before and during the buyout process.

Paula: What's the best approach for trustees to take? One big buyout or smaller buy ins along the way?

Ramona: It is worth remembering that as schemes mature, their funding positions see a natural improvement. This could be as a result of either benefits crystallizing or members seeking transfers out. At valuation time, I'm always struck by the difference between the value put on pensioner versus deferred member liabilities. This feeds into the pricing for bulk annuities as well. Pricing is keener for pensioner members compared to deferred members. Whilst it can make sense for large schemes to consider a number of pensioner buyins along the way, it might not be so effective for smaller schemes with an already limited pool of assets. I'd keep in mind the size of assets remaining to achieve even small levels of investment performance, as buyins could increase their reliance on the sponsor. You also need to consider the final population to be insured. Leaving too much deferred member liabilities may reduce the number of interested insurers.

Paula: Thank you, Ramona. So, to summarize, trustees need to start early to prepare for a buy in. It's important to keep the sponsor involved throughout the process, and you need to consider carefully whether one buy in or a series of buy ins are the right thing for your scheme. For more information on any of these topics, please visit our website.