Scope and summary
This note provides a practical summary of some key aspects of risk reduction in block annuity policies as of June 2021.
Takeaway points include:
- A decision to enter into a block annuity contract is an investment decision of the trustees;
- It is important to ensure that a diagram is “ready” for a transaction;
- Setting up a âjoint task forceâ to encourage sponsors and trustees to work together is attractive to insurers;
- Resolve schematic issues at an early stage to prevent them from disrupting the project.
Summary of the legal situation
The main legal issues with bulk annuity contracts are:
- The decision to enter into a block annuity contract is an investment decision of the trustees and, therefore, the trustees should ensure that the investment powers of their plan allow the investment (including whether there are any restrictions in the rules). Trustees should also ensure that the investment decision is in accordance with the system’s statement of investment principles (which should be updated if necessary in consultation with the sponsor);
- A block annuity policy (in almost all relevant cases) cannot be assigned once signed and, therefore, the trustees must be confident that they are satisfied with the terms of the policy;
- The policies will contain important provisions including how GMP equalization can be handled, the liability of the trustees, the ability to challenge calculations and what happens if a plan falls into the pension protection fund. Trustees should also be comfortable with the data protection and cybersecurity provisions under the contract, as a significant amount of data is likely to be transmitted to the relevant insurer.
Relevance to Trustees / Employers in more detail
In recent years, there has been a trend for many Trustees (including those with small to medium-sized plans) to opt for surrender and / or surrender benefits for a variety of reasons, including:
- securing the services of affiliates;
- seize the opportunity to reduce the risks in their plan or even work with the sponsor to completely remove the plan liability from the sponsor’s balance sheet;
- transfer some (or all) of the longevity, investment and inflation risks of the plan to a third party;
- reduce the overall risk of volatility for the promoter in terms of contribution levels;
- provide a solution when the Trustee and / or Sponsor seeks to wind up a plan.
Improved affordability, driven by reduced life expectancy, good asset performance and attractive insurer rates, have made full buyout an achievable goal for many other plans and their sponsors. .
What can you do to prepare for a buy-in or buy-out?
In a booming market, insurers can afford to be more selective about which plans to quote. Therefore, if you want to maximize the potential of a competitive bidding process, you need to ensure that your plan is in good shape to make it attractive to as wide a range of insurers as possible. To achieve this, you must:
- Reconcile your data: extract those old paper files or microfiche records, contact former administrators and write to members to fill in gaps or correct inconsistencies in your data;
- Prepare specifications for your plan: we recommend that you ask your lawyer to review it as soon as possible;
- The practice may not be in accordance with the rules. Undertaking this work now avoids issues that arise later in the process that can derail or delay a project. Being aware of problems as early as possible also increases the range of potential solutions available to trustees;
- Consider GMP: If your plan holds GMP, sponsors may wish to discuss the issue of GMP equalization with their advisors through a legal conversion and conducting a GMP increase exchange exercise. retreats at the same time. Lloyds judgments could offer trustees and sponsors a real opportunity to reshape benefits in a way that could maximize the interests of insurers; and
- Form a âJoint Working Groupâ: Most importantly, Sponsors and Trustees need to work together (using a âJoint Working Groupâ) so that they can show the insurance market that there is a real commitment (from a time and financial point of view) to get the transaction done.