Lack of resource capacity meant many schemes either could not get a quote or only got one as insurers focussed on those they were most able to trade with. Many fear another situation where schemes are unable to secure a quote for buyouts even though the market environment and funding levels are favourable.
“Each quote takes time, resources and cost,” Collinson explains. “If a large number of quotes are requested, insurers will focus on those with an increased probability of transacting and where the scheme is a better fit for the insurer’s business.”
Furthermore, buyouts are process and administration- heavy transactions. As deals continue to get bigger, that could create “indigestion- type problems”, as Hayes describes it, because insurers who have just transacted a big deal need to let it settle before they can perform another.
There is an implicit view insurers will always be there in the market, but that may not be the case at certain points. Where an insurer has done a large transaction the opportunity to deal with that firm may disappear for a period of time. “There is a lot of talk of multi- billion pound deals this year,” Ellis says. “If that happens, it will have a big impact on the resources and capital available. Meanwhile, the occurrence of big deals will also push up demand.”
The result of this indigestion will likely be disappointment for all but the best schemes as insurers become more selective and schemes find themselves competing for attention. Smaller schemes in particular could suffer as only one or two providers are interested in sub-£100m transactions.
Prepare to compete
In the eyes of the insurers, ‘best’ often means ‘best prepared’.
“Schemes need to demonstrate the trustees and sponsor are working closely together, they have a clear understanding of what a buyout might cost and the steps necessary to get there, especially in terms of data and clarity on benefits,” according to Collinson. “ Insurers will also be drawn to schemes holding suitable assets.”
The importance of data cleansing is already clear to many schemes. Research by EDM Group and ITM showed 45% of pension professionals believe the chances of securing a de-risking solution are ‘poor’ to ‘very poor’ if schemes have weak data. Some 79% believe better quality information would result in paying less for a de-risking solution.
The Merchant Navy Officers Pension Fund (MNOPF) has first-hand experience of the benefits good preparation can make.
The £1.3bn Old Section of the MNOPF is already some way down the path to buyout with Rothesay Life and Lucida (recently bought by L&G). The Old Section previously completed three buy-ins of £500m in 2009, £100m in 2010 and £700m in 2012.
“In early 2012, it became apparent the conditions were right to do the final tranche of £700m,” says Bob Hymas, MNOPF CFO. As a result of its prior experience, the scheme reconfigured the portfolio to mirror what an insurer would be interested in transacting on.
“We sold out of equity and looked very closely at illiquid assets like property holdings,” Hymas says. “By September 2012, the portfolio was pretty much configured for transaction. This smoothed the process, which went through in December 2012. It is a question of how easy it is to move assets to the insurer so they are able to match the liabilities most effectively.”
Governance is also critical to help schemes compete. The Old Section of the MNOPF is overseen by a small, dedicated sub-committee, which meets regularly, can respond quickly to issues as they arise and is surrounded by strong and trusted advisers.
“This,” Hymas says, “helped move everything forward so that, at the point where the decision to go ahead was reached, it could happen very quickly. The process was incredibly smooth due to the planning, preparation and due diligence.”
It is not all one-sided however, and Hymas adds a note of caution: “Don’t forget the members at the end of the process.”
For the MNOPF, the insurer’s ability to address any issues the beneficiaries might suffer, such as payments from several sources, was a key selection criteria.
As funding levels continue to improve buyouts will become increasingly viable for both schemes and corporate sponsors. Preparation in terms of data, governance and portfolio holdings will prove critical to avoid disappointment for schemes competing to secure deals in a capacity-constrained buyout market as volume and deal size increase.
As Ellis points out: “Insurers are getting increasingly picky.”
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