How smaller schemes achieve good value in the bulk annuity market
Many smaller schemes are coming to the conclusion that the natural place for their liabilities is with an insurance company.
One of the main reasons is the additional return insurance companies expect to achieve by investing in long-term illiquid assets that would be very hard for a small scheme to access alone. Insurance companies also benefit from significant economies of scale and have large dedicated teams solely tasked with managing risks.
Legal & General has always supported schemes of every size and we have completed a number of transactions with a value of below £10 million in the last year, the smallest being £1 million.
Following the 2014 Budget changes several new providers have entered the market. This increased competition can only be positive for schemes, leading to increased innovation and better pricing.
Given Legal & General’s significant experience of helping smaller schemes achieve their de-risking goals, I will now share our top five tips for approaching a transaction.
1. Robust governance
Having the correct team in place to approach the market is fundamental. I believe a joint trustee and sponsor approach increases the chance of a successful transaction. Engaging the right adviser is also important - many consultancies have specialist teams to run such processes and have specific, streamlined, small scheme offerings that look to reduce costs. This a hotly contested area so shop around for the best advisers for you.
Understand your objectives as well as the affordability constraints and probability of meeting them - there is no point in spending money obtaining insurance quotations if the transaction is not currently affordable. Again the right adviser can help you with this and look into alternatives or ways to increase affordability. Also be aware that scheme actuary buyout estimates prepared for statutory purposes are typically more prudent than actual costs due to competition in the market.
3. Ensuring data and legal quality
Most schemes believe they have good quality data and legal documentation in place and this is true when it comes to managing a scheme on an ongoing basis. However when it comes to approaching the insurance market many lack the detailed information required to achieve best pricing. These include data items such as postcodes, marital status and spouses dates of birth, any outstanding legal issues and a thorough understanding of all the defined benefits offered. A thorough review of all data and legal documents is therefore highly recommended. The money spent could save you much more on the final insurance premium.
4. Approaching the market
Whilst there is lots of appetite from insurers, they are limited by resources. Given the work required to produce a quote, many will need to select which quotes to proceed with based on the likelihood of success. Evidence of the completion of the three steps above will help in demonstrating to insurers that there is a transaction to be done. You should also consider how many insurers to approach - sometimes the additional cost of approaching the whole market can outweigh any additional price reductions you might get compared with only approaching a targeted two or three.
Bulk annuity prices move around with market conditions and in the current financial climate we have seen movements of around 4-5 per cent in a relatively short timeframe. To avoid a transaction moving out of reach you may wish to consider ensuring your assets are aligned to move broadly in line with insurer pricing. High level regular monitoring of the funding position need also not be an expensive option and could result in significant savings.
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