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Buy ins and buy outs: Be prepared (be very prepared)

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The ever-growing volume of bulk annuity transactions has seen them become somewhat more standardised, but perhaps more importantly, the lawyers and consultants who regularly advise in this area now have established relationships (and precedent documentation) with most or all of the relevant insurers.

Does that make it easier to transact quickly? - Yes, but only up to a point.

Preparatory work

A buy in transaction should ideally represent the culmination of a number of different workstreams, some of which will take months or even years to complete.

The good news is that you can start the process well before you expect to transact. In fact, a lot of the preparatory work will have other benefits and/or needs to be done sooner or later in any event, so it may be worth doing even if you aren’t anticipating an insurance transaction at all.

For example, the process of getting a benefit specification signed off commonly flushes out a few areas where the scheme’s administrative practice isn’t perfectly aligned with the rules, often giving rise to over- and/or under-payment of benefits for some members.

Although it’s an uncomfortable process, the sooner such problems are identified and addressed, the better. Quite aside from the fact that underpaid beneficiaries should have the benefit of their full entitlement, trustees need to understand the true extent of the scheme’s liabilities so that they are accurately reflected in the scheme’s funding arrangements. Meanwhile continuing to make overpayments increases the scale of the problem, while past overpayments can become harder to recover (for both legal and practical reasons).

There are exceptions – schemes where, for one reason or another, it doesn’t make sense to undertake all of this work in advance. But over the long term, most schemes will benefit from being as “transaction ready” as possible.

Market dynamics

I would argue that this has never been more important. With an increasing number of schemes looking to secure liabilities, insurers can afford to be picky about where they allocate their resources. Particularly for smaller and medium-sized transactions, insurers are much more inclined to quote (and/or offer more attractive terms) where they believe that a transaction can be executed quickly and relatively straightforwardly.

It is possible to do a buy in quickly, with comparatively little preparation, but trustees seeking to do so should expect to “pay the price”; both in a literal sense (a higher overall cost) and in the sense that the process is likely to be labour-intensive, difficult and may not achieve all of the original objectives (e.g. accepting possible mismatches where benefit issues have not been fully resolved).


It’s also worth thinking about the fact that even a very experienced lay trustee is unlikely to have significant experience of insurance transactions. After all, most schemes will only do one buy in, and no scheme winds up more than once. And it is important to recognise that some of the decisions required, particularly in a buy out and wind up exercise, may feel very alien (e.g. crystallising discretions).

Professional trustees, on the other hand, do this sort of thing all the time, and can add real value on insurance transactions. That isn’t to say that lay trustees shouldn’t undertake these transactions, but just like the scheme itself, the trustees need to be prepared.

It’s therefore well worth considering whether lay trustees should “skill up” on insurance transactions well before they consider actually going out to the market, and/or bring professional trustee expertise on board at the relevant time.

Most DB schemes are closed, so a great many are ultimately heading for buy out and wind up. It’s never too early to start thinking about what you’ll need when the time comes.

Tom Jackman, Associate Director, Sackers