GEARing up for a buy-out and wind-up

We recently published our LCP GEARS Framework – setting out how we at LCP help clients to achieve a successful journey to their ultimate goals, capturing opportunities and managing risks effectively on the way. In this blog series we look at each step in turn, and what it means in practice.

In this edition, Julian Jones and Sonia Nayyar look ahead to the final stage in our framework, ‘Completing a wind-up efficiently’ and what this means for them in the context of the LCP GEARS framework.

Introduction

Completing a full buy-in transaction is a cause for celebration. Many risks will now be covered by the insurance policy, with most, if not all, of the payments that the scheme makes to members reimbursed by the insurer.

However, a lot of work is still required to transfer responsibility for paying the benefits to the insurer and issue individual policies to members (known as moving to “buy-out”) before the scheme can ultimately be wound-up. Trustees will want to make sure that all known issues have been resolved before this happens, while from an employer’s perspective, the length of time this takes, and the uncertainty of the costs involved can be frustrating and may conflict with wider business objectives.

In this blog we consider ways to manage this tension, while noting that winding up a pension scheme is a complicated process that requires careful management to make sure risks are managed appropriately.

Although primarily aimed at trustees, it’s also highly relevant for the sponsors of pension schemes. Whatever your role, as you read on, please remember that careful planning in advance will make the transition from buy-in to buy-out easier and smoother when the time arrives.

Establishing a clear framework for the tasks ahead

As the buy-in transaction gets closer to being executed, trustees often appoint a project manager to help make the transition to buy-out and wind-up as smooth as possible.

Appointing a specialist with experience of the buy-out and wind-up phase is crucial here to help you avoid some of the common pitfalls and unnecessary delays and costs. The work required after the buy-in transaction is quite different to that needed to get the transaction over the line, which is why insurers have separate specialist post-transaction teams too.

The project manager will generally report to the trustees, although may sometimes be appointed by the sponsor in a more limited capacity. The project manager will drive forward completion of tasks and play an important role in helping the trustees to identify and manage risks ahead of time, make sure the sponsoring employer is appropriately updated, use their experience to help advisers and administrators to address any issues that arise and raise any concerns at an early stage.

Getting ahead – developing a clear path from the point of buy-in to wind-up

Getting clear lines of communication and responsibility as well as project plans and budgets in place at the point of the buy-in will allow the trustees to set the tone for the project and make sure that data cleanse work can begin without delay.

Agreeing a framework for monitoring fees for the wind-up will help the trustees and sponsoring employer to understand each other’s expectations, agree common goals and hit the ground running.

Insurers have told us that time is often lost straight after the buy-in while the administrators and other advisers work with the trustees to establish budgets, data cleanse requirements and implement administration processes with the insurer. This can eat into the data cleanse period, extend the timescales for the project and push up the costs. This can be an issue for the trustees as well as the sponsoring employer.

To avoid this, it’s really important to bring all the parties together early, scope out all the work required and get everyone’s agreement to the timescales. This also means you can have a clearer idea of how much money will be needed for expenses. Combining this information with up-to-date estimates of any remaining insurance premiums, will help to assess and monitor the level of any surplus.

Buy-out and wind-up – executing the plan

Administration processes

Immediately after the buy-in, the trustees of the scheme should make sure that the new administration processes are up and running between their existing administrator and the selected insurer. This transition can be further supported by trustees taking steps to try to make sure that the administrator of their scheme has enough resource and training to effectively manage the post-transaction phase.

Getting this done quickly may save time and money. Any unplanned deviation from insurers’ processes and factors will result in a mismatch between benefits paid to members and the corresponding reimbursement from the insurer which will lead to adjustment premiums being required later.

Member communications

The trustees will need to carefully consider the messaging to members over the whole period to the buy-out and wind-up. This may span several years, depending on the amount of data cleanse required.

There are certain statutory communications which must be issued to members during the wind-up. The trustees’ goal here will be to make sure these requirements are met, whilst providing members with enough information to clearly understand any changes to their benefits, options and who is providing their benefits.

There should also be a process for handling any concerns raised by members, which, if not resolved effectively, could significantly delay the wind-up. Insurers are unlikely to agree to take on responsibility for schemes whilst there are outstanding member complaints.

Buy-out - transferring administration and payroll

Trustees will want to make sure the handover of the administration and payroll to the insurer is as smooth as possible. Members need to have confidence in their new administrator from day one.

Agreeing the format of this data at the start of the data cleanse will save time later and avoid the need for further iterations. A dedicated post-transaction project manager can identify and manage some of the key risks here.

The buy-out - transferring responsibility for providing the benefits to the insurer

Once the trustees have given the instruction to the insurer to move to buy-out, the insurer will issue individual policies to members. These documents will need to be reviewed carefully by the trustees and their legal team to ensure they match the scheme benefits as they will set out the benefits and options available to members after the buy-out.

Preparing for wind-up: rehousing any remaining benefits

The scheme may still have some other benefits that are not covered by the main insurance policy. This might include for example Additional Voluntary Contributions or benefits covered by historical individual or bulk insurance policies in the trustees’ name with other insurance companies. Rehousing these benefits takes time and so it is important to engage early with providers to obtain full details of these arrangements so that they can be transferred appropriately and in good time ahead of the wind-up.

The sooner that details of these benefits can be established the better. Work could even start before the buy-in.

Trustee protections

The arrangements here will vary from scheme to scheme. It will depend on the level of cover secured from the main insurer who will be providing the benefits after the buy-out. However, it is advisable for trustees to start to discuss the need for employer indemnities and additional insurance post wind-up well ahead of the buy-out so that costs can be considered and factored in at an early stage.

Again, this is an area where trustees and employers can agree what might be required well ahead of the buy-out.

Final stages

Unless the assets are approaching nil the trustees will need to manage any surplus. This is often an involved and time-consuming process to consider the options and then issue the necessary communications to members.

Managing the assets down to nil by the time the final accounts are signed and the scheme is wound-up will be critical. A small surplus at this stage could be a serious fly in the ointment and might add as much as 6 months to the overall wind-up. This is a risk that the project manager should identify and manage well ahead of time.

The scheme is now ready to be wound-up. Final accounts can be signed and the final wind-up deed is executed.