How to get your defined benefit pension scheme buy-In or buyout ready

If you are considering entering into a bulk annuity arrangement to de-risk your defined benefit pension scheme, there are a number of steps you should take to get your scheme ready to transact. We set out below the five key areas you should focus on to get your scheme ready for a buy-in or buyout transaction. We have seen that schemes which focus on these areas see increased insurer interest and attract lower prices.

Not all the steps discussed below will be relevant or right for all schemes and in certain circumstances, for example where working to tight timeframes, it may not be possible to carry out all those that are in full. Therefore, working with an experienced adviser, who can help you to identify which of the steps will have the biggest positive impact for your scheme, is critical to achieving your goals.

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Project management and cost control

The first area to take a closer look at when getting your defined benefit pension scheme ready for a buy-in or buyout transaction is the importance of having robust project management and cost controls in place.


Step 1

Project Planning:

You must have a realistic plan that covers every step of the process, which for some schemes could run from pre buy-in right through to winding up the scheme.

Additional information:
  • The absence of a plan leads to inefficiencies, which often have a large, adverse financial impact.
  • Having a structured approach will minimise the length of the overall process.
  • A project plan will enable trustees to communicate progress to sponsors and vice versa.

Step 2

Budget Management:

Having an up-front benchmark figure of costs will avoid surprises during the project.

Additional information:
  • A full project plan allows an indicative cost for the whole project (up to the winding up of a scheme, if applicable) to be calculated.
  • Correct budgeting and cost management allows the sponsor to manage the cash flow of the project more carefully.

Top Tip:
Identify who will control the planning and management of your buy-in or buyout

Scheme investments

Here we take a look at the importance of your scheme investments when you are getting ready to transact.


Step 1

Monitor the (buy-in/ buyout) funding level:

You must monitor the funding level to identify when you can transact, you can do this through your adviser or by using the JLT Buyout Comparison Service.

Additional information:
  • The approach for this will depend on how close you are to carrying out the transaction:
    • Within a year: In this scenario, you should seek actual insurer quotes and monitor the funding level against insurer pricing.
    • Further away: In this situation, monitor the funding level based on the monthly indicative insurer pricing.
  • Set up triggers with your investment consultant and managers to de-risk assets and transact a buy-in or buyout when your funding level improves.

Step 2

Consider hedging and liquidity:

You should consider how close you are to transacting and therefore how closely your investment strategy should match insurer pricing. Thought should also be given to the amount of time required to disinvest your assets.

Additional information:
  • Determine what physical or synthetic interest rate, or inflation hedging, should be put in place.
  • As timescales for the transaction reduce, ensure that improved hedging is in place.
  • Check redemption notice periods for assets that you hold, they could be lengthy and you might need to sell the assets well before the transaction takes place.

Step 3

Settle premium payments for the policy:

You will need to liaise with the insurer and your investment adviser to agree an effective payment process to mitigate ‘out of market’ risk.

Additional information:
  • Whilst the definition of small and large deals differ from insurer to insurer, generally:
    • smaller deals usually have to settle in cash.
    • larger deal transaction costs can be saved if the scheme holds assets that the insurer will accept in specie. (In specie means assets are transferred to the insurer rather than being sold and the premium paid from the resulting cash).
  • Since the introduction of Solvency II, insurers generally want payment up front. There may, however, still be some flexibility on the timing of the premium payment.

Top Tips:

  • Set up a monitoring system
  • Review your investment strategy
  • Ensure joined up planning with the bulk annuity broking team

Getting your investments and investment strategy ready before you go to the market will save you time and ensure that the transaction progresses smoothly.

Benefit specification and audit

Whilst quotes can be obtained from insurers using our Buyout Comparison Service, once you decide that it is time to transact, insurers will need further clarity over the benefits they are pricing. These not only include the pension payable to members but also things like increase rates to be applied to pensions in payment and any spouses’ pensions payable when scheme members die.

When creating the benefit specification you may wish to carry out a benefit audit. Not only will an audit be a useful check to determine whether the benefits have been calculated correctly but it will also provide you with peace of mind should the benefits to be covered span multiple scheme rules, or if there has been a merger of schemes in the past.

You may also want to go a step further and undertake a benefit simplification exercise. If your scheme contains complex benefits, has a number of different scheme rules or different sections, simplifying benefits may make your scheme more attractive to insurers and enable you to get cheaper quotes.


Step 1

Benefit specification:

Insurers need sufficient information on the scheme benefits to be able to price and administer them accurately. You also need to ensure that correct benefits are paid.

Additional information:
  • A benefit specification document should definitively set out what members are entitled to under the scheme rules and also capture administration practices.
  • The benefit specification should be prepared so that it is sufficient to:
    • provide broking information.
    • carry out a benefit audit (if it is being undertaken).
  • This can be prepared well in advance of the transaction as it doesn’t expire.
  • Furthermore, trustees will need to codify any discretions (e.g. discretionary pension increases or death benefits) so that insurers have clear instructions.

Step 2

Benefit audit:

A review of sampled members versus a detailed benefit specification will provide trustees with comfort that members’ benefits have been calculated and administered in accordance with the scheme rules.

Additional information:
  • Trustees generally prefer this to be undertaken by an independent team to those who do the day-to-day administration, although this independent team can be from the same organisation.
  • Any systemic issues identified can then be investigated and corrected.

Step 3

Benefit simplification or conversion:

This involves legal amendments or actuarial conversion to simplify elements of a benefit structure that are costly to insure but are of little or no value to a member. For example; alignment of pension increases with payment dates, harmonising minor benefit differences across membership categories or conversion of GMP (and wider benefits) to ordinary scheme benefits.

Additional information:
  • Benefit conversion simplifies the structure and administration of the scheme, making it more cost effective to run for both the insurer and the administrator.
  • It is best to undertake this activity before the transaction. If it is done after the transaction then there is no guarantee that the insurer will pass back any cost savings.

Top Tips:

  • Produce a written benefit specification early on in the process
  • Consider the “depth” of any audit that is required
  • Any benefit conversion will need robust and pragmatic advice

Member data

You need to think ‘buy-in/ buyout data’, which may be more detailed than that used for the day-to-day administration of your scheme. For example, buy-in and buyout data will include up-to-date postcodes, marital status and spouse's date of birth.

There’s a common misconception that data needs to be 100% clean before you go to market. That’s not true, but it does need to be of a sufficient quality for insurers to price properly. If your data is not of a good enough quality, there is a possibility for the price originally quoted to increase.


Step 1

Data audit:

A data audit will enable trustees to agree a workable plan to address any identified issues and missing data items.

Additional information:
  • The simple presence of common and conditional data items as specified by the Pension Regulator (tPR) will not be sufficient for insurers.
  • In our experience, the most common missing data items are postcodes, up-to-date marital status, spouses’ dates of birth and spouses’ pension amounts (for pensioners).
  • For any missing data items, insurers make prudent assumptions, potentially leading to an increase in their price.

Step 2


This involves using specialist services to identify missing data including:

  • Address tracing - Insurers need postcodes for the majority of members for pricing purposes; these are typically available for current pensioners but are often missing or out-of-date for deferred pensioners.
  • Existence checking/mortality screening - Mortality screening is primarily required for current pensioners and enables you to avoid insuring benefits that are no longer payable.
  • Marital status tracing - Marital status tracing enables you to identify members' current marital status and find their spouses’ names and dates of birth.
Additional information:
  • It is good practice to undertake address tracing and existence checking/ mortality screening at regular intervals.
  • Marital status tracing can help you to validate or set scheme funding assumptions.
  • It is worth identifying marital status early in the process as it can materially move pricing if it is sourced after the transaction.
  • Marital status can be updated immediately before the transaction as this information will go out of date over time.

Step 3

Data verification:

This involves writing to your members to confirm the details of their benefits and the personal data held on them. This allows your members to challenge data or benefit records held on them, with any queries from members then investigated and resolved.

Additional information:
  • Data verification gives insurers and you the confidence that the data is correct and reduces the risk of future challenges by your members.
  • You can use this exercise to request additional data (for example, marital status and spouses’ details before a trace is performed).
  • This is normally undertaken in the months leading up to a planned transaction but can also be undertaken after the transaction if preferred.

Step 4

Calculation of missing data:

This step involves calculating any required data items that are absent, such as spouses’ pension amounts or pension splits.

Additional information:
  • The spouse’s pension amount for a current pensioner is often calculated after the member’s death, so, it may not be held on the scheme records or be up-to-date (for example, pension increases may not have been applied since the member’s retirement).
  • Although appropriate assumptions can be made for first round pricing, at some stage insurers will need accurate spouses’ pension amounts for current pensioners as the percentage typically varies depending on the amount of cash members commuted at retirement.
  • For deferred members, insurers will require relevant pension splits (for example, relating to the ‘Barber window’ and where different revaluation or pension increase rates apply).
  • You must allow time for calculation in case archived records need to be recalled or legal advice is required (for example, on scheme equalisation basis).

Step 5

Guaranteed Minimum Pension (GMP) reconciliation (only applies to schemes which were contracted out of the State Earnings Related Pension Scheme (SERPS):

This involves reconciling scheme GMP records with HMRC and making any adjustments necessary to residual benefits.

Additional information:
  • If this is not already underway, it must be started urgently since the theoretical HMRC 2018 deadline for completion applies to all schemes.
  • Issues identified in GMP reconciliation include discrepancies relating to GMP amounts and/or scheme membership (for example, HMRC may believe that there are members in the scheme that you have no record of).
  • Where changes are identified, GMP amounts will need to be adjusted and scheme records updated. A decision will also need to be made on whether to alter the amount of pensions in payment.

Step 6

GMP equalisation (only applies to schemes which were contracted out of SERPS):

This involves agreeing and applying a methodology to address GMP inequality between male and female members.

Additional information:
  • Male and female members of contracted-out schemes have different GMP payment ages and their GMP is accrued at different rates.
  • There’s no definitive methodology for GMP equalisation but the Department for Work and Pensions is now supporting an actuarial value approach, compensating by value rather than on a month by month basis. An actuarial value approach is the only solution that many insurers will support.

Top Tips:

  • A rapid data audit will generate a ‘shopping list’ of items to fix
  • A tracing agency can identify missing personal information for most members in a few hours, with a slower, manual tracing then being required for a smaller number of members
  • Telling members about their benefits earlier rather than later will make the entire process safer
  • Data creation should usually be handled by a dedicated projects team (and should be given hard completion deadlines)
  • The administrator’s core system should be updated with the newly created data and procedures should be changed to ensure it stays up to date
  • GMP reconciliation must be managed robustly and cannot be left until later
  • GMP equalisation is usually implemented at the time of the transaction, rather than carried out for an on-going scheme

We have seen cases where it has taken schemes as long as three years to get their data ready. So, even if you are some time away from going to market, it is good practice to start the process as early as possible.

Liability management exercises and other options

It may be beneficial to all parties – sponsor, trustees and members – to consider other exercises before transacting or getting quotes. This could be a transfer, or enhanced transfer value exercise, which could potentially reduce the cost of the transaction and give members more choice and flexibility over how they receive their benefits.

Another option is a pension increase exchange offer. You may have a complex increase structure under the scheme that may not be attractive to insurers, and some members may prefer to receive simpler increases in lieu of a higher benefit at outset.


Step 1

Exploring alternative settlement options:

There are several options that you can consider that could benefit your scheme members by providing them with more choice on how they receive their benefits and also reduce the price of a buy-in or buyout.

Additional information:
  • Liability management exercises can be run either in parallel to a bulk annuity transaction (with results reflected in the final balancing premium) or ahead of a bulk annuity transaction
  • Three main types of exercise:
    • A bulk transfer value exercise could be run to settle deferred liabilities at a cost that is materially less than a full buy-in or buyout.
    • A pension increase exchange (PIE) exercise could be run if there are significant non-statutory pre-1997 pension increases, particularly where these are of a form that insurers find difficult to hedge and are therefore relatively expensive to insure (for example, CPI-linked pension increases).
    • A trivial commutation exercise could be run where there are lots of small or short service benefits.
  • These types of exercises can be either sponsor or trustee driven.


Step 2

Considering Medical Underwritten Bulk Annuity (MUBA):

In a MUBA, insurers use information on members’ health and lifestyle to price a policy more accurately.

Additional information:
  • If an insurer believes the members being covered have a lower life expectancy than the norm, a MUBA could cost less than a traditional buy-in or buyout.
  • A top slicing approach can be adopted by identifying a smaller number of members who have the largest liabilities and carrying out a MUBA for them.

Step 3

SPECIFICALLY FOR BUYOUT Assigning existing annuities (or an existing buy-in policy):

This involves transferring existing polices from the Trustees’ to members’ names.

Additional information:
  • This needs to be completed before a scheme can be wound up.
  • Doing so earlier, subject to the receipt of acceptable legal advice and scheme funding, simplifies the scheme and saves ongoing costs.

Top Tip:

  • Cooperation between the sponsoring employer and the scheme's trustee is essential and can have a large impact on the buy-in/ buyout deficit

As we said at the top of the page, schemes which focus on these areas could reasonably expect to increase insurer interest and attract lower prices. However, all schemes are different and so not all the steps set out will be applicable to every scheme, nor will each of the steps have the same level of impact from one scheme to another. Therefore, whatever situation you are in, the importance of clear advice from an experienced adviser to help you identify and prioritise the steps you should take cannot be understated.

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