Why the rules are just the beginning…

Project management

The benefit specification from start to finish

When securing benefits through a bulk annuity policy with an insurer, it’s important to ensure the benefits are carefully documented in your benefit specification. Why? Because, otherwise, you may later find you’ve not secured what you’d thought you had (and you are left with mismatches and extra residual risks which need to be managed).

But, getting the benefit specification right isn’t necessarily as easy as it sounds. It often takes longer, costs more and involves more people than trustees might expect.

So how do you build your benefit specification?

  1. Review the trust deed and rules – work out at the outset what deeds you have and what needs to be reviewed based on which members’ benefits you are securing. The latest consolidation (and any subsequent amendments) will usually be key. But, are there have sizeable populations covered by older rules? are there lots of different sections of members resulting from complex scheme history covered by other documents?
  2. Overlay other documents – there may be other documents (such as minutes, booklets and/or member announcements) which act as the formal source of benefits and therefore also need to be reviewed. For example, if the power of amendment allows changes to be made by resolution or a closure happened by reference to an announcement.
  3. Add the admin practice – information from the administration team will help to plug the gaps not covered by the rules, tell you how ambiguities in the rules have been interpreted in practice and help identify potential discrepancies between rules and practice. The earlier you know about any discrepancies, the better, as they may need to be resolved before you can buy-out. There will almost always be special categories of members who have benefits that aren’t codified in the rules too.
  4. Crystalise trustee discretions – scheme rules will give trustees various discretions in relation to the benefits being secured. For example, does a benefit arise to be paid? how should a benefit be calculated? who should receive a benefit? The trustees need to tell the insurer how they want these discretions to work so that the insurer can price and operate the benefits in that way. Trustees should consider how discretions have been exercised in the past and what the pricing implications of their decisions are likely to be.
  5. Factor in the insurer’s approach – the insurer will ‘translate’ your specification into its own format and language so that it fits with their systems and processes. This can feel like it’s re-doing the work you’ve already done or creating mismatches, but you’ll need to navigate this. There may also be some places where insurers simply won’t agree to do things the way the scheme does them. For example, the insurer may only agree to provide dependants’ pensions if “adult dependant” is defined in a very specific way.
  6. Finalise the specification after the data cleanse – once the bulk annuity policy is signed there will be a verification exercise to confirm the accuracy of the data and benefits secured (the “data cleanse”). Once this is completed, the data and benefit specification will be finalised and there may need to be a pricing adjustment and balancing payment to reflect any changes from the initial specification and data used to calculate the premium.
  7. Split the benefit specification into individual policies – if the Trustee decides to move to a full buy-out, the benefit specification for the bulk annuity policy will need to be translated into individual policies for each member.

Read our briefing on managing risk in risk transfers and explore our risk transfer webpage for more information. Sackers are well placed to advice trustees and companies on bulk annuities and pension scheme risk transfers.

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