How can small schemes improve their chances on the buyout market?
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What are the factors that influence whether an insurer is interested in transacting with a small scheme? Experts highlight the role of spouses’ data, clarity over scheme design and the choice of GMP equalisation method – where the picture has shifted recently.
Small pension schemes have to be particularly strategic when approaching the insurance market for a risk transfer quote; demand tends to be high, and insurers have to put in considerable work up front for quoting on a scheme of any size – therefore the bigger the premium, the better.
However, there are ways they can improve their chances – clean member data being a key one. The smaller the scheme, the bigger a proportion each individual member is of it – and therefore mistakes in data can have a bigger proportional impact on the benefit payouts.
Until death do us part: Spouses’ data can have a dramatic impact
One area where mistakes can be uncovered by insurers if they are not removed first is with spouses’ data, said Andrea Collins, senior DB business development manager at insurer Just Group.
The impact on the premium of any mistakes being uncovered in the insurer’s data cleaning phase is difficult to quantify, she said, as it will depend on the original assumptions, but “the most dramatic change would be that somebody was single... but turns out to be married. The difference in premium can be quite significant, it’s a big driver of change in premium,” she said, speaking at a webinar organised by the Pensions Management Institute on Tuesday.
Data can still be cleaned in the post-transaction ‘cleansing window’, but waiting until then can have “a sting in the tail”, she warned. This is because in their contracts, most insurers will have a ‘material change’ clause, which effectively says that if the difference between the quote and final premium is more than a certain percentage, the insurer has the right to reprice that change on whatever basis they see fit rather than agreed terms of contract, she explained.
“I have seen cases where marital data has triggered that clause,” she said. “I have seen enormous premium change because the trustees realised that a spouse was significantly younger than assumed before finding out the accurate details.” She added that such change is unwelcome for trustees who “want that certainty” over cost.
But head of technical, research and policy at consultancy Spence & Partners, John Wilson, said material change can also work in favour of a scheme. “We also had case where [the premium] improved by over 5%,” he said, but agreed that data is important and can make a difference.
Write discretionary benefits into rules
Other practical steps small schemes can take to be buyout ready revolve around scheme design.
Graham Newman, a scheme actuary at Spence, advised carrying out a full audit and getting sign-off by the legal advisers. Doing so “gives certainty over what you need to insure”, he said, adding that many schemes also have discretionary benefits: “Get those hardcoded into the rules, create certainty and achieve the best possible price from insurers.”
The $64,000 question: Should schemes convert GMPs?
A big question for small schemes seems to be GMP equalisation and whether to convert GMPs. Wilson said more schemes appear to be moving away from the D2 conversion method and looking at year-on-year methods, which “has created a bit of tension”.
Collins said Just can administer conversion but the trend seems to be more towards the C2 or B methods now: “It seems to be what people want to do now. We have set ourselves up to administer benefits on those bases.”
However, Collins encouraged trustees to engage with insurers on GMP equalisation to understand what they are open to – and avoid cutting the scheme off from a competitive price by using a particular GMPE method.
Newman agreed that D2 has lost some of its initial appeal because there are still “unanswered questions” around tax. “C2 has become a bit more popular,” he said. This overall trend of more than one equalisation method being administered by insurers gives schemes more choice, he remarked, allowing them to select the option that is best for them.
What other steps can help small schemes get a buyout quote?