By Chris Hawley, Risk Transfer Partner, Barnett Waddingham
It’s important to remember that the “buyer” of a bulk annuity contact is the scheme’s trustees, who are required to take formal advice as part of the process. However, sponsors have a key role to play, and we actively encourage them to be involved in the process from the outset, taking advice where relevant (e.g. in relation to any accounting implications and affordability). Ultimately, the views of the sponsor are important for any bulk annuity purchase, particularly if additional funds need to be paid into the scheme.
Traditional approach
In our experience the vast majority of bulk annuity transactions have been led by a risk transfer advisor selected by the Trustees – be that an existing advisor or an external firm brought in to support this project. One of two approaches is typically taken:
1. Establish a Joint Working Group
A Joint Working Group (JWG) would include representation from both the trustee board and sponsor. In some cases the trustees’ risk transfer advisor will provide advice to the whole JWG, while in others the sponsor will appoint a separate advisor who might join meetings and feed into discussions. The decision on which of these approaches to adopt ultimately depends on the extent to which the trustee board and sponsor’s objectives are aligned, and the advice the sponsor needs to manage internal stakeholders on the transaction process.
The JWG structure can be used for pension schemes of all sizes but typically are not used by the smallest schemes where processes are streamlined to help control costs.
This recent testimonial from a scheme sponsor using a Joint Working Group shows how things can work effectively: "We are grateful to Barnett Waddingham for successfully managing the recent bulk annuity purchase for our defined benefit scheme. They brought expert knowledge of the process to help all parties work together towards a common goal, and very much felt like ‘one team’ working with our own actuarial advisers. Their flexibility through the process and clear project updates helped us keep up to speed on matters right up to signing the contract. They kept us well informed of budgets and fees so there were no unexpected surprises." Where the same party is advising both the trustees and sponsor, the specific nuances around this will depend on the level and nature of the work required and the conflict policy of the relevant advisory firm. Where this approach is being taken, it is important to have clearly drawn-out conflict lines to help should there be any ambiguity.
2. Working collaboratively in a light touch way
Many trustee boards – particularly those of small schemes or those associated with family run businesses – will share the advice they receive with the scheme sponsor (on a non-reliance basis) and allow them to join meetings/discussions and input their views. Essentially facilitating a light touch ‘Joint Working Group’. In our experience, this approach works well, enabling a proportionate advisory process to be followed with both parties receiving the advice/information they require without doubling up on advisory fees. Where there is a strong working relationship, it also facilitates a quick and efficient decision-making process.
The Corporate Captaincy
A theme over recent years has been sponsors committing to support a transaction but requesting or requiring that their advisory team lead the insurer discussions and are appointed to provide the trustee advice process. From a sponsor perspective it’s not an unreasonable ask where they are paying in a contribution and believe their advisory team will better represent their interests with insurers.
This can be an appropriate and necessary process in some situations. Particularly if there’s a corporate governance route that needs to be followed, or more importantly if the trustee advisory team isn’t sufficiently experienced or doesn’t have the capacity to support. This approach risks friction with trustees as they are the ones who need formal advice on the transaction and under this approach would require the trustees to appoint the sponsor’s advisers. In some cases we’ve been involved with this hasn’t been a problem, in others it has been a bigger issue and has caused push back from the trustees with a potential dent on the wider trustee / sponsor relationship.
Again, a robust conflict policy is needed. The trustees will need to consider the default appointment if there is a conflict that can’t be managed, leaving them with the very possible risk that they could be left “high and dry” mid-way through a transaction.
A risk with this approach is the draw of the initial deal rather than the bigger picture objectives of the scheme. By that we mean the sponsor and their advisers focus on getting a transaction done quickly but don’t consider the approach, scale and feasibility of the post transaction work required. In cases where the advisory appointment terminates on the completion of a transaction, the trustee can be left feeling somewhat at sea, having to work out how to deliver their requirements under the buy-in policy. Ensuring the trustee views and objectives are being represented at all stages is critical to ensure the initial deal doesn’t cause any unexpected surprises post transaction. In reality, having a thorough process throughout to pension scheme wind-up is just as important for the sponsor to help guard against residual risks.
Joint Navigation Strategies
Given some of the challenges around a single corporate driven appointment, it has become increasingly popular to use a “co-led” structure. Historically this was the domain of larger schemes, but more recently this has started moving across to the smaller end of the market.
Under this approach each party has their own adviser (which helps with conflicts and division of responsibilities), who both sit on a Joint Working Group, and are actively involved in the market approach and insurer negotiations. This approach can come about when the sponsors and trustees want to receive independent advice and have trusted advisory teams.
The key challenge of this approach is cost. With more hands-on deck there’s a risk of duplication of work and scope for increased discussions and negotiations. Having said that, two brains can be better than one, and arguably there’s increased pressure on the insurer to deliver when engaging with two experienced advisers. Insurers can also find this process frustrating if it is not clear who the lead negotiating adviser is or if mixed messages are provided on objectives. Agreeing a protocol for sharing information and negotiating positions with insurers is critical to making this process successful.
We have worked in this way on a number of transactions. When doing so it is critical to ensure that everyone is navigating to the same outcome - advisors trying to point score doesn’t add anything to the process other than frustration, delays and a worse outcome. As always there’s a bit of detail to work through, such as data processing, ensuring the right processes are in place to share data and agreeing which advisor will be sharing the data with the insurers.
Role of the Independent Trustee
Many trustee boards now include an Independent Trustee, either as part of the trustee board or as sole trustee. These firms and individuals are critical to the overall advisory structure. They know the consultants and know what works well in terms of an advisory structure. Given their experience of completing transactions, their involvement can also help ensure a quick and efficient process is followed, and enhance the outcome achieved. Independent Trustees will likely work with the sponsor closely to agree an approach that works for both parties.
Steve Delo, Chairman of PAN Trustees: “Independent Trustees are now effectively repeat buyers of bulk annuities and accumulate considerable practical experience of the process and the technical challenges. Given these transactions are significant, irreversible, complex and game-changing events, a scheme’s trustees will be making some of the biggest decisions they will have faced. Having an experienced independent trustee on the board to augment the decision-making team can be enormously beneficial in the planning, key commercial negotiations and ultimate decision making and project execution. PAN Trustees have completed many transactions across the wide market of insurers, deploying different governance and advisory structures that are the best fit for the scheme’s requirements. A critical part of the role is to know your scheme’s stakeholders and identify efficient and collaborative ways of working with them. If allied with the right advisory inputs and project management, this should lead to the very best outcomes.”
Summary
In summary there’s no right answer to the question “what’s the best advisory structure?”. The answer depends on the specifics of the situation and parties involved. At the outset of a bulk annuity transaction project, we work with our clients identify what approach will work best for them, and to ensure that the other party involved is supportive of this to prevent the process from becoming derailed.
Our three top tips, regardless of the structure adopted, are:
• Use an experienced advisory team who know how to run a process and knows the market
• Ensure the different parties involved are working collaboratively to the same goal
• Remember the transaction journey extends beyond the day you sign the deal
Kieran Mistry, Director of Defined Benefit Solutions at Standard Life, part of Phoenix Group: “Collaboration between trustees and sponsors is critical to a successful buy-in project. When a scheme first approaches the market, transaction certainty is a key factor in an insurer’s triage process. Evidence of all-party engagement and alignment, which most often is in the form of a well-considered, nimble governance structure, gives us confidence to commit resources to a transaction. We’ve seen many forms of adviser structures be successful, but from our perspective, the process is most efficient when there is a clear reporting and negotiating lead which can engage flexibly with us to navigate the broking and execution process. “
|
