Professional Pensions Admin Panel April 2010
There appears to be quite a level of activity in the buy out market recently - news of a £3bn deal has just been released. The rationale for completing this deal was that it reduced risks and increased security for members. What are the real advantages for members of schemes that have entered into such arrangements?
The buying out of benefits secures the members benefits by mitigating the risks should the sponsoring employer going into liquidation, as this would ultimately result in the scheme being forced to enter the Pension Protection Fund with a reduction to the members’ benefits.
The scheme’s liabilities are identified and fixed at the date on which the valuation for buy out is carried out, therefore these are factored into the buy out costs. The result of this is that the members’ benefits will be fully funded at the buy out date and remove the threat of a reduction being applied to transfer values paid from the bought out arrangement.
As a result of the buy out, the members will be issued with an individual policy in their own name giving them a certainty as to their future benefit entitlement and removes the reliance on decisions made by the trustee body.
Looking at a slightly more basic point - if a scheme is considering a buy in or buy out what administration data will any potential provider need to see and how complete and accurate does the data need to be? If data is not complete what impact will that have?
Data needs to be as full, complete and accurate as possible at the valuation date. There can be no hidden nuances as the individual policies are issued based on known data. There are also cost implications, as the bigger the gaps and the greater the degree of ambiguity of the data, more assumptions will be built into the cost by the new provider, thereby increasing the cost to the employer.
There can be no room for error as far as the members are concerned, as all promised benefits must be known at the time the policies are issued. If the data supplied is not correct, then the member will receive incorrect level of benefits and the new provider will charge the employer an incorrect buy out cost.
Once a deal has been struck what ongoing responsibilities does a scheme administrator have? Are additional administration processes and controls (and therefore potentially costs) necessary?
In the event of a Buy In as the membership is defined and the benefits are known, costs can be fixed on a per capita basis. In terms of additional responsibilities the administrator will need to administer the policies via individual policies rather than by a Trust Deed & Rules, which as the policies are now insured, will need to ensure adherence to FSA regulations and in particular, to meet their Treat Customers Fairly requirements.
This in turn leads to more comprehensive reporting as the membership needs to be constantly validated to allow the insurer to track and value their liabilities on a monthly basis. In addition, factors needed for calculations will be on an individual, rather than a scheme-specific basis which will add complexity to the administrators processes.
For larger deals typically there do appear to be a syndicate of re-insurers involved in the buy out. What risks and mitigating controls should a scheme administrator consider to ensure that it covers the possibility that the syndicate splits up or decides to exit the buy out market?
As the administrator is only there to operate the scheme on a day to day basis, there is little they can do, other than to ensure that both the financial and individual member data, is both accurate and up to date to allow for assets to be transferred as and when required by changes in the buy out parties and that valuations of members’ benefits can be easily completed.
by Daniel Jacobson
Client Manager