Quick buy-in processes creating ‘glaring gaps’ for wind-up journeys

Written by Jack Gray

06/08/2024

Quicker than expected buy-in processes are creating “glaring gaps” for defined benefit (DB) pension schemes’ wind-up journeys, Hymans Robertson has warned.

The consultancy’s latest paper in its Risk Transfer series stated that leaving wind-up activity until the last minute, and in some cases after a buy-in transaction has begun, was creating “numerous problems” for schemes.

As buy-in deals were being completed more quickly than many schemes had planned for, some wind-up and buyout processes were not being completed in time, Hymans Robertson found.

It urged DB schemes and trustees to act quickly to ensure the activities that they need to complete in relation to data, benefits, and assets were part of their wind-up plans.

Due to these issues, schemes were potentially facing an erosion of surplus with additional costs affecting both members and scheme sponsors, it warned.

Furthermore, Hymans Robertson said that timescales for wind-up were often ill-judged, with the buy-in to buyout journey taking “far longer” than anticipated.

Hymans Robertson partner, Jo Gyte, noted that the pace of change within the buy-in market had been “unprecedented” in recent years, and the consultancy understood that schemes were eager to take advantage of insurer pricing and market change, and move to buy-in quickly.

“However, schemes are 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 warned.

“From our experience we know that the two to three year expectation for wind-up can creep into three to five years when a buy-in occurred more quickly than expected.

“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.

“Our paper provides details of the key questions that schemes should ask to ensure they have a full picture of the steps needed for a scheme’s wind up, prior to beginning their buy-in negotiation with the insurer.”

Hymans Robertson’s paper called on trustees and sponsors to start developing their wind-up strategy early, assess their data and benefits, to not forget the ‘small stuff', and to make sure they have an appropriate governance structure in place.

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