The seven steps for a successful pension risk transfer

The UK bulk annuities market has experienced a surge in activity in recent years which shows no sign of slowing down. As an increasingly popular strategy for DB pension schemes to manage and reduce risk by transferring retirement benefit risks to insurers, this article aims to explain the key steps involved in the buy-in buy-out process, shedding light on their significance in the pension risk transfer process.

Pension scheme de-risking demands meticulous attention and deliberate planning from key stakeholders at every juncture to ensure optimal outcomes for both the pension scheme and Insurer. Below, we outline the key areas to focus on as you prepare for a buy-in, buyout or longevity swap. 

Assessing the needs of the pension scheme

The first step in the process involves a comprehensive assessment of the pension scheme's risk transfer needs. Factors such as funding levels - many schemes are fully funded, investment strategy and risk appetite play a significant role in determining which pension risk strategy aligns with the scheme's objectives.

Accurate data and benefit calculations

Before engaging with insurers, one critical factor that pension schemes must prioritise is data accuracy and precise pension calculations.

The accuracy of member data and pension calculations plays a pivotal role in the buy-in and buyout process. Insurers depend on this information to accurately price premiums and assess pension risk exposure. Ensuring that member data is up-to-date and accurate can significantly impact the terms of the transaction and ultimately influence the success of the de-risking strategy. By taking measures to enhance data accuracy, pension schemes foster greater transparency, build trust with insurers and secure more favourable outcomes in their pension risk journey.

Engaging with insurers

As de-risking volumes are anticipated to remain high, its critical pension schemes position themselves as an attractive proposition for investment. Pension schemes must collaborate with insurers, providing accurate and up-to-date member data and pension calculations to facilitate precise pricing and risk evaluation. A transparent and productive partnership is essential to achieve successful outcomes.

Concerns around capacity have been well voiced in recent years, with deal volumes leading to bottlenecks as schemes prepare for buyout. Issues such as GMP equalisation, often deferred during the initial buy-in phase, is creating additional uncertainty and costs to schemes and insurers looking to reach buyout.

Related article: How insurers drive pension de-risking through bulk annuity purchases

Conducting due diligence

During the due diligence stage of pension risk transfers, both schemes and insurers conduct their respective evaluations. They may engage with third-party advisors to assist in the assessment process. These experts can include actuarial consultants, legal advisors, as well as investment managers. Their involvement adds an extra layer of expertise and impartiality to the evaluation, ensuring that all aspects of the transaction are thoroughly examined.

The goal at this stage is to assess each other's financial stability, track record in handling bulk annuity transactions, and overall suitability for the pension risk transfer. Through this collaborative effort with third-party experts, both parties gain a comprehensive understanding of the potential risks and benefits involved, leading to well-informed decisions and successful outcomes in the de-risking journey.

Negotiating terms and agreements

During this stage, pension schemes and insurers negotiate terms and agreements for the transaction. Key aspects include pricing, contract terms, risk transfer mechanisms, and any additional provisions specific to the scheme's needs.

Further to this, residual risk insurance, based on risks identified and agreed upon between the scheme and the insurer. may be

Keeping members informed

For buyout transactions in particular, its important members are kept informed throughout the process. By ensuring members are kept informed throughout the process, both insurers and pension schemes can achieve a seamless transition while nurturing a positive relationship with members.

Keeping them informed, engaged and supported throughout the pension de-risking journey not only contributes to the success of the buyout but also upholds the overall financial security and well-being of the pension scheme members.

Implementing the buy-in or buyout transaction

During the implementation phase of the buy-in buyout process, the agreed-upon terms are put into action, and risks and assets are transferred between the pension scheme and insurer.

This crucial stage requires meticulous coordination and organisation to ensure a smooth transition. Legal documentation is prepared, and data is transferred and validated to ensure accuracy. Risks are transferred from the pension scheme to the insurer, and if it's a buyout, assets are transferred as well. Effective member communication is maintained throughout the process, and compliance with regulatory requirements is closely monitored.

The successful execution of the transaction phase depends on effective collaboration and oversight, ensuring a seamless and secure transfer of risks and assets for both parties involved.

A powerful tool to manage and mitigate risk

Successful pension risk transfers offer significant benefits to DB pension schemes, including reduced risk exposure and improved financial security for members. However, it's crucial to consider factors such as pricing fluctuations and regulatory changes that may impact the long-term outcome.

Buy-ins and buyouts are a powerful tool to manage risk and enhance financial security for members. By navigating the key steps in this process, pension schemes can achieve greater stability and confidence in funding retirement obligations. 

Heywood Passport, our innovative pension risk transfer solution, has been built to assist and guide pension schemes and insurers through the complex process. With our technology, we streamline the buy-in and buyout journey, making it easier for you to navigate the de-risking process successfully.

Discover how Heywood Passport supports data accuracy and confidence in pension risk transfers.
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