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Securing a £10M buy-in of a defined benefit scheme | Case studies | Quantum Advisory

Securing a £10M buy-in of a defined benefit scheme

Quantum Advisory - Enabling the trustees of a £10m defined benefit pension scheme to secure a buy-in through successful teamwork, careful planning and project management 


Client: A UK based, not-for-profit organisation

Background

In October 2020, upon the sale of the sponsor’s premises, the trustees of a long-standing client of Quantum were provided with a significant lump sum payment into the pension scheme to support ongoing funding. The scheme did not have sufficient funds to complete a buy-out at that stage, but the increase in asset value meant that this became a viable short to medium-term target. 

Two years later, the sharp upward swing in gilt yields resulting from the infamous mini-budget in September 2022 filled most of the remaining funding gap. We advised the trustees to become ‘buy-out ready’ as soon as possible and to look into buying out the scheme’s liabilities with an insurer at the first opportunity, which might now be possible without any further sponsor contributions. 

After reviewing the risk transfer market, the trustees asked us to lead their buy-out project which included the risk broking aspects. Their objective was to remove the investment, inflation and mortality risks associated with the scheme through a buy-in policy, with the aim of converting this to a buy-out policy and winding up the scheme in the near future. 


The Project

Detailed project planning was key, We took the lead on agreeing a detailed and achievable project plan with the trustees and sponsor. This was split into three sections, setting out:-

    1. The roles and responsibilities of all parties. This helped us to identify whether there were professional advisers appointed in all areas and whether the current advisers were most suited to guiding the trustees through the buy-in and buy-out exercises. This prompted the trustees to appoint a different legal adviser for the buy-out to the one they used for ongoing work. The sponsor also appointed a legal adviser for any advice they might need. It was also useful to designate a dedicated buy-out project coordinator at this stage. Quite often, minor delays in individual tasks can impact the overall timescale of the project so regular monitoring of the project plan is an essential part of a transaction being completed on time and within budget. 
    2. A list of all the key tasks that would be required. There are many standard tasks that need to be completed for all buy-out exercises, such as carrying out data gap analysis, drafting a benefit specification and obtaining legal advice. However, in this case there were also a number of non-standard tasks, such as removing a deferred revaluation underpin from the benefit structure and reviewing the scheme’s AVC policies to ensure they could be discharged easily prior to the scheme wind-up.
    3. A timeline of key events. This section plotted the key tasks on a weekly timeline which clearly showed how long each stage should take and also allowed us to determine when certain mini pieces of work should be carried out optimally. Planning tasks like this allowed individual service providers to be informed in advance of when their work would be required so they could resource effectively, giving more certainty over timescales and budgets.

Approaching the Market

We spent the initial few months ensuring that the scheme’s membership data and documentation were in good order, after which we were in a great position to approach the market for indicative quotations. 

After receiving quotes from three insurers, we found one in particular who was very approachable and keen to help the client by providing them with an idea of live pricing on an indicative basis, in a reasonably short timeframe. The insurer was attentive and sympathetic to the trustees’ cause, and offered a deal at an attractive price despite this being the busiest time for the UK buyout market. Due to the unprecedented level of activity in the market, we made a call that the most likely way to achieve a full scheme buy-in quickly, before the Christmas period, was to negotiate terms with the insurer directly and to make them aware of the scheme and sponsor’s specific circumstances. The trustees transacted with the insurer in October 2023, leaving the scheme with a small surplus and no requirement for further funds from the sponsor. The trustees and the sponsor were delighted to complete the buy-in process quicker and cheaper than originally anticipated and all parties were comforted knowing that the vast majority of pension risks have been mitigated. We were delighted to successfully deliver the joint objective of the trustees and the sponsor as planned. 

Adam Cottrell, Lead transaction advisor at Quantum Advisory, said: 

”Having worked diligently with the Trustee and client since 2010, it was very fulfilling to see them achieve their long-term strategic objective as planned and provide additional security for Fund members. 

“One of the main challenges was to complete the transaction so seamlessly at an extremely busy time for the market. Knowing how this enhanced level of pension security will benefit members over the long term, at a time when everyone’s finances are so stretched, makes this a particularly rewarding end to a successful project. The Trustees and the Client put their trust in us to make the right moves, at speed, at key milestones of the transaction, something which is so often critical in getting this size of deal over the line. We are very proud to have helped them reach this key milestone on their journey to buy-out."

Conclusion

Taking the same tried and tested approach of successful teamwork, careful planning and project management, we are now working closely with the trustees through the next phase of the project. The ‘data cleansing’ stage presents the scheme’s data in an insurer-friendly format so it can be transferred to the insurer seamlessly for them to carry out the ongoing administration tasks. Once this is complete, in around 12 months’ time, we will complete the buy-out with them and wind up the scheme. 

The sponsor can then concentrate on their commercial operations, supporting businesses in their local area.