The Covid-19 situation has turned normal life upside down and thrown financial markets into a tailspin. What should trustees and companies who are considering a major financial transaction such as a pension buy-in do in this scenario?
A natural initial reaction for many will be to pause. After all, we have seen the largest market disruption since 2008 and the Covid-19 restrictions are impacting all our lives. How do you run a transaction working from home?
However, market disruption can generate opportunities. The aftermath of the Brexit vote saw some of the best pricing for buy-ins in recent years, when well-prepared schemes took advantage of short-term market dislocations. Recently, we have seen volatility in the corporate bond and gilt markets enable some schemes to secure buy-ins with significant price improvements.
The most important first step: don’t panic. Your best approach will depend on your specific circumstances. One size doesn’t fit all at the current time any more than it ever does. Some examples I have seen over the past few weeks include:
- Accelerate a full buy-in to try and take advantage of improved pricing, particularly where the corporate covenant is stressed and improved pricing means a buy-in is possible without any additional cash funding.
- Halting a buy-in where the affordability of a transaction was impacted by falls in the scheme’s other assets.
- Proceed with caution. This is by a long way the most common approach. It provides time to understand the extent and nature of the current disruption, while retaining an ability to lock into attractive pricing and achieve the risk reduction delivered by the buy-in.
A key question for many trustees and companies is whether the financial strength of insurance companies is robust enough to be confident placing business with them. Recent insurer public statements have been confident and all major insurers operating in the buy-in market remain open for new business. Some have gone further – Legal & General has committed to paying its dividend this year, although others have deferred their payments.
Insurers are generally well immunised against short-term market fluctuations due to their requirement to match asset and liability cashflows very closely. They will come under more pressure if there are widespread corporate defaults from the high quality, investment grade companies that they invest in. That is not something we have yet seen, but of course many companies will face significant challenges in the coming months. The government has also prioritised helping business; government and central bank policies may provide a lifeline allowing companies in the hardest hit sectors to avoid default.
Another challenge is operational. We have all been getting used to working from home, running meetings via video call and having virtual team meetings. A tricky area to think about has been member interactions, eg when running a marital status data collection write-out exercise to provide information to help insurers price competitively.
These issues are all manageable though. I’ve been impressed at how quickly and positively our team and others have reacted to digital working. Whether its Microsoft Teams, Zoom or Blue Jeans, everyone has a way of keeping in contact. More specific challenges can be met using online member portals for collecting data from members, digital data rooms and some flexible thinking. Just ignore the kids when they photobomb.
Importantly, your decision as to how best to proceed with any major financial decision should be driven by a rational assessment of the economics, financial security and operational aspects of the transaction. Your views may be different to the situation when you started your process, but then the status quo position in the absence of a buy-in is different too. Try not to let emotional concerns, seemingly unstoppable deal momentum or perceived operational constraints guide your decisions.
Keep calm and stay safe.