Fast buy-ins risk increasing wind-up costs, Hymans warns

In the wake of the gilt market volatility in 2022, many DB schemes found themselves much closer to insurance-level funding positions, which led to a record volume of buy-in and buyout activity in 2023.

However, many schemes that secured buy-ins quickly may not have completed sufficient work to get the scheme ready for a full buyout and wind-up, Hymans Robertson said in a new report.

As of 31 March 2023, approximately 3% of the 5,051 private sector DB schemes – about 150 – were in wind-up, according to the Pension Protection Fund’s Purple Book.

It typically takes 18 months to go from a buy-in – which sees a scheme’s liabilities fully insured but with the insurance contract remaining as an asset on the scheme’s balance sheet – to full buyout with assets and liabilities transferred in full to an insurance company.

It then takes another year to wind-up the scheme, Hymans Robertson said – but these timeframes were only for those with a “planned and well-run process”. Often, the full journey can take between three and five years, depending on circumstances.

Jo Gyte, partner at Hymans Robertson, said that by moving quickly to buy-in, schemes were “at risk of failing to start the essential work required to wind-up, vastly underestimating the cost and time required, and having to incur additional running costs which could have been avoided”.

Gyte added: “We would urge trustees and sponsors to mitigate the three key risks – in relation to data, benefits and assets – as soon as possible and start their planning as early as they can.

“Developing a wind-up strategy ahead of their buy-in can be the most effective way to ensure assets are ready, risk can be managed, and data has been reviewed.”

What’s needed in wind-up

While a buyout transfers all liabilities and the assets needed to cover them to an insurer, there are several steps required to complete the transaction and fully settle the scheme.

One of the biggest exercises involves ensuring that the scheme has a full, accurate record of all member records. This is to make sure that the scheme has fully provided for all promised benefits, including spouse or survivor payments.

“Trustees might only start investigating how much there is to do after the buy-in, so they might not know the exact scope of data work,” Gyte wrote in a Hymans Robertson paper.

“Another challenge comes from resourcing constraints in pensions administration teams. This live issue in the pensions industry can add to delays.”

Trustees must also conduct a legal review of benefits to ensure payments are accurate and to resolve historical issues. Any residual assets must be held in an appropriately liquid investment portfolio so they can be distributed appropriately and in accordance with the scheme rules.

The longer a wind-up takes, the more costs are incurred, Hymans Robertson warned – potentially eroding any surplus and reducing the amount of money that can be distributed to members or sponsoring employers.

Be prepared

Hymans Robertson highlighted four areas for trustees to consider in order to ensure an efficient journey from buy-in to buyout and on to wind-up.

The consultancy recommended developing a plan for winding up the scheme a year before settling a buy-in. A full audit of benefits and data was also recommended to start a year before buy-in.

A strong and efficient governance structure was also important, Hymans Robertson said, as it enabled trustees to monitor progress and respond quickly to any problems that may arise.

Finally, the consultancy urged trustees to bear in mind residual risks and issues that may be perceived as small. For example, additional voluntary contributions or individual annuities held on the scheme’s balance sheet needed to be secured appropriately.

In addition, any previous buy-ins needed to be checked for compliance with promised pension payments.

“Find out what you have in this category, and decide when to start discharging these benefits,” Hymans Robertson said. “Doing this work up front might mitigate the risk of needing to run the scheme while you wait for these benefits to be settled.”

Further reading

Market for large bulk annuity deals slowed in H1, data shows (1 August 2024)

New kids on the block: Brookfield and Utmost to enter bulk annuity market (8 July 2024)