Greg Wenzerul talks through his tips for successful de-risking transactions

From a provider perspective, it’s reassuring to see successful transactions in the pensions de-risking market, but also disappointing to see missed opportunities, time and effort being squandered trying to secure de-risking solutions. It’s comforting to see that there appears to be an increasingly large proportion of positive exercises being undertaken, this is probably a result of the increased use of specialist de-risking brokers in addition to more efficient governance and decision making between sponsors and trustees.

It remains key that trustees considering a bulk annuity should, at an early stage of the process, establish their criteria and goals for any proposed de-risking exercise. Price relative to technical provisions is important - other factors should also be considered including counterparty risk, assets that will be transferred, scheme’s investment policy post transaction, execution capability and brand of the counterparty.

So what features do successful transactions, both past and present, exhibit?

Project planning
While the final transaction decision rests with trustees, such a decision almost always requires the consent of the sponsoring company, irrespective of whether or not a capital injection will be required. Setting up a well structured joint working party/sub-committee with representatives from both the trustees and sponsor has proved to be an efficient and optimal platform to secure a transaction.

Successful transactions have a very focused set of goals and criteria that are set in advance of approaching insurers and reflect the appetite of the sponsor to make capital injections, what is considered an acceptable funding impact, as well as detailing the key requirements of the insuring counterparty - financial strength, security structure, reputation, and the ability to wind-up the scheme. This is then captured in a comprehensive project plan that is agreed by all.

Counterparty risk
A buy-in could be viewed like a corporate bond, where instead of coupons and redemption payments, the bond pays out the actual benefits of the underlying membership of the scheme. If the insurer becomes insolvent, then the payments are at risk so it’s critical that the trustees transact with a counterparty with track record and solid financials.

Consultants and fees
One key decision is the choice of broker to help run the de-risking process. In our experience, a separate mandate for a transaction often achieves better results than running these exercises through the normal client team, unless they have experience in this specialist area.

A broker disconnected from the scheme’s appointed adviser may be able to focus solely on the transaction-related deliverables and the appointed adviser/scheme actuary can provide a source of independent comfort. It is clear that in this market both the experience and track record of the broker are key to getting the best deals over the line, and at the best prices.

Some products such as longevity swaps are favoured by some consultancies and can complicate a buy-in process. Without strong and efficient decision making, the aims and goals of a project can become blurred, causing time and costs to rapidly increase. The broker’s mandate should ensure that focus is retained.

At a very early stage, prior to approaching the providers, affordability should be judged and a decision made whether to proceed. By taking these steps an experienced broker should prevent unnecessary cost and wasted exercises. The broker will also know that when an attractive deal is on the table, it’s important to transact swiftly rather than trying to ‘continually optimise’. Markets move quickly and opportunities can still get lost late in the day.

It’s important to ensure that the broker is success focused, and is able to deliver the right solution at the optimum time for the scheme. While we see less failed approaches to the market than three years ago, we still see more ‘toes in the water’ than necessary, albeit not from the most experienced advisers.

Written by Greg Wenzerul, head of defined benefit solutions, Prudential

Share Story: