Deciding what to price
Sammy Cooper-Smith
How do you make sure that your scheme receives attention from insurers in a busy market? And what can you do as a trustee to ensure that your scheme is in a good position to approach the bulk annuity market?
Insurers will want to work with as many schemes as possible, but at times working with all of them just isn't feasible due to restraints in the capacity of their people, reinsurance, capital and asset pipeline. Determining which pension scheme processes we can or can’t work with is often referred to as “triage”. Working with your advisers, prior to coming to market, to understand how insurers “triage” and making sure you have prepared well will help you attract the highest number of bidders.
Each insurer will have its own key requirements such as preferred transaction size, the proportion of deferred liabilities they can accept and whether the scheme has transacted with a competing insurer in the past. There are however times where these filters alone are not enough to whittle down the opportunities to those which an insurer has capacity to work on. In these circumstances, insurers will start to focus on secondary issues to try to identify which processes have the highest likelihood of closing, and in particular, which are most likely too close with the given insurer.
There are three main areas we focus on when assessing the viability of a transaction and ticking as many of these boxes as possible will increase a schemes attractiveness in the market place:
- Process issues
- Feasibility
- Data
1. Process issues
Is the deal supported by both trustee and company? Is there a joint working group in place? If the answer to either question is no, then the probability of the transaction closing quickly is greatly diminished, as the party not currently in-the-know will need to draw breath once they become aware of the proposed transaction and take their own advice before any proceeding further.
Appointing experienced advisers who are familiar with the bulk annuity market and who have good, open communication channels with all insurers is also really important. Often insurers like to know that the scheme is being guided by advisers who understand what is important to insurers and gives them the confidence that the process is likely to be well run and thought though.
Appointing experienced advisers who are familiar with the bulk annuity market and have good, open communication channels with all insurers is really important.
2. Feasibility
Is there a clear hurdle price or target in mind for a transaction? Are advisers able to articulate it, and share it with insurers? For insurers, the existence of a price hurdle demonstrates a clear understanding of the marketplace and also an articulation that a process will close.
Transparency on the schemes price target for a transaction allows insurers to focus resource on processes where we believe a trade is viable. Early conversations with insurers will also avoid schemes incurring costs coming to market when it is highly unlikely any insurer will reach the hurdle price.
For a transaction involving deferred members, it is also important that trustees have considered their scheme factors and how these compare to the factors provided by insurers. This a critical piece of thinking which has caused a stumbling block for many schemes we have seen, and makes a huge difference to our assessment of a transactions likelihood of closing.
Transparency on the schemes price target for a transaction allows insurers to focus resource on processes where we believe a trade is viable.
3. Data
Trustees are usually advised to ensure their data is “in order” prior to coming to market, and we echo this guidance. Whilst it is unlikely that an insurer will refuse to quote because of a small number of data issues, they could be the factor that tips the balance between one transaction and another.
Are there clear gaps in the data, inconsistent data items, or a large number of queries being asked of the adviser? These sorts of issues suggest that the scheme may not have done the necessary preparation, and the data isn’t of good enough quality for a transaction to occur. It is better to take your time to get this right before approaching the market, so that any issues can be identified and resolved in good time, and not rushed through in a busy quotation process.
Has the scheme collected sufficient experience data (showing changes in member status, such as deaths or transfers), and does it reflect the population included in the transaction? For instance, if a quotation is to cover all pensioners with a pension over £10,000 per annum, can we identify which members within the experience data are associated with pensions in excess of £10,000? Or if the quotation population represents one section of a scheme, does the experience data contain section codes to recognise each section? Quality experience data will allow us underwrite the longevity basis and solicit reinsurance quotes for the underlying longevity risk.
Has the scheme collected marital status information, such marital status of members and the dates of birth of any spouses and dependants? This data helps insurers manage their risk exposure and there are a number of reinsurers who load their quotes for prudence in the absence of this data. It is also important to be clear where this data has come from – was it collected for each member during employment or on retirement, or as a recent bulk write-out exercise? If information comes from multiple sources, then it is important to be able to distinguish between these in the data provided.
Insurers want to quote on as many processes as they can and will find it hard to turn down a well-prepared scheme that has met all of the points above. Preparing well and considering how an insurer will triage you scheme prior to coming to market will ensure the widest interest from the right insurers for your scheme.
In a survey we completed with Mallowstreet the results showed that 60% of schemes are checking the validity and accuracy of member benefits
About the Author
Sammy Cooper-Smith
Sammy is head of the Business Development team, and has been with Rothesay since 2011. He has worked on transactions with the pension schemes of Asda, National Grid and telent, amongst others, plus our insurance transfers with Prudential, Aegon and Zurich.