Contracts, surveys, professional advisers, uncovering long-forgotten boxes, and negotiating funding

Entering into a buy-in to secure DB pension liabilities shares many similarities with moving house. Both are significant undertakings that can be expensive, time consuming and stressful. Each require input from professional advisers and may involve negotiating additional funding whether from a bank or building society when moving home or sponsoring employer in the case of a buy-in.

What can buying a home teach us about the buy-in process?  

When moving house you may be relocating to a new area. In a buy-in context, trustees face a similar transition to the insurance regime underwritten by the Financial Services Compensation Scheme (FSCS). The FSCS protection applies to both a buy-in policy (as a long-term insurance policy) and in due course to individual annuity policies issued to members on any future move to buy-out.

As noted above, both processes will involve extensive professional advice from a number of sources. When buying a home, you will, typically instruct an estate agent, similarly, trustees will need to appoint a risk transfer specialist before approaching the insurance market. In both cases, lawyers will review the contracts and prepare necessary documentation. For a house move this often includes a property information form setting out details on boundaries, planning permissions, guarantees and environmental issues etc to give the buyer a clear understanding of what they are buying. In a buy-in the equivalent is the benefit specification which details the benefits and payment terms which the insurer is being asked to insure.

Both processes will require confirmations and warranties. For a buy-in, the exact details will vary by insurer. In both cases, the seller/trustee may need to make certain disclosures against these warranties. For example, revealing an ongoing or past boundary disputes with a neighbour, or in a pensions context, any member disputes.

Most house sales involve surveys and other due diligence. Similarly, trustees will also carry out due diligence when considering potential insurers. This can range from a covenant assessment of an insurer’s financial strength to looking at the performance of an insurer’s administration team and ESG credentials. As with moving house, it will not only be price that is the relevant factor for trustees on deciding which insurer to go for.

Just as you prepare your house to be more attractive to potential buyers there are steps trustees can take before going to market to make their scheme more appealing to insurers. This might include reviewing and cleansing scheme data, reviewing the availability of benefit options which may be difficult to insure (ie bridging pensions or pension increase exchange options) and removing any benefits which may be tricky to insure (ie benefits linked to continued employment with the sponsoring employer). A key part of buy-in preparation will be considering and codifying various trustee and employer discretions into an insurable form. These discretions are likely to include consents to early/late retirement, availability of benefit options such as commutation and the distribution of death benefits. This process is not unlike carrying out a spring clean and decluttering your home before showing round a prospective buyer (perhaps even baking some bread!). And, as with a long-occupied house, the longer your pension scheme has been established, the more “decluttering” is likely to be needed.

As we start to move the furniture and pack up the cardboard boxes, it is not uncommon to uncover some cobwebs. This is the same in a buy-in context. Some of these cobwebs might be minor, but others such as a normal retirement equalisation issue, an invalid deed of amendment or perhaps administrative practices which don’t align with the rules such as payment dates or proportionate first increases, can be more serious. Once identified these issues will need to be dealt with. If serious (think Japanese Knotweed!) it could potentially increase a scheme’s liabilities and even derail the entire transaction.

Likewise, packing up may also uncover some long-forgotten boxes in the shed or the loft. In the buy-in context, these “forgotten boxes” might take the form of historic bulk transfers-in or members with special terms. Careful consideration will be required to make sure any such benefits are covered under the terms of the buy-in policy.

Another step in moving house is agreeing with your buyer which fixtures and fittings you will stay (and which will go). In a pensions context, those fixtures and fittings left behind are those residual risks which will ultimately remain with the pension scheme’s sponsoring employer after buy-in. There is no such thing as “all risks” insurance cover. There will always some degree of residual risk not covered by a buy-in transaction. The key is to identify these potential risks early and discuss with the sponsoring employer how these will be managed in the future.

But the hard work doesn’t stop on moving day. There will still be unpacking, tidying and possibly some decorating to do. The same is true for buy-in. An extensive data cleanse period will begin, which in most cases, will include completing work on equalising for the effect of GMPs.

Clearly significant work is involved in entering into a buy-in, much like moving home. However, at the end of the buy-in trustees and their sponsoring employers will have eliminated investment, inflation, and longevity risks, while providing enhanced security for member benefits and reducing volatility on the sponsoring employer’s balance sheet.