Bulk annuities: Who should steer the ship?

A well-run bulk annuity process can look plain sailing, whilst a badly run one is very much battling choppier waters.  

Below, we consider some of the different advisory structures for leading a bulk annuity process, including the rise of co-led processes.  It’s important to use an experienced team to avoid those icebergs in the water. 

The ‘buyer’ of a bulk annuity contact is the scheme’s trustees, who are required to take formal advice as part of the process. However, the views of the sponsor are important for any bulk annuity purchase and they should be involved from the outset, particularly if additional funds need to be paid into the scheme. 

Traditional approach

In our experience, most bulk annuity transactions have been led by a risk transfer advisor selected by the trustees – be that an existing advisor or an external firm brought in to support this project.  

One of two approaches is typically taken:

1. A Joint Working Group (JWG)

A JWG would include representation from both the trustee board and sponsor. 

In some cases, the trustees’ risk transfer advisor will advise the whole JWG, while in others the sponsor will appoint a separate advisor who might join meetings and feed into discussions. The decision on which approach to adopt ultimately depends on the extent to which the trustee board and sponsor’s objectives are aligned, and the advice the sponsor needs to manage internal stakeholders.

The JWG structure can be used for pension schemes of all sizes but is typically not used by the smallest schemes where processes are streamlined to help control costs. 

Where the same party is advising both the trustees and sponsor, the specific nuances around this will depend on the level and nature of the work required and the conflict policy of the relevant advisory firm.  Where this approach is being taken, it is important to have clearly drawn-out conflict lines to help should there be any ambiguity.

A recent testimonial below from a scheme sponsor using a JWG demonstrates how things can work effectively:

Scheme Sponsor Quote

2. Working collaboratively in a light touch way

Many trustee boards, particularly small schemes or those associated with family-run businesses, will share the advice they receive with the scheme sponsor (on a non-reliance basis) and allow them to input their views - essentially, facilitating a light touch JWG.

In our experience, this approach works well, enabling a proportionate advisory process to be followed with both parties receiving the advice/information they require without doubling up on advisory fees. Where there is a strong working relationship, it also facilitates a quick and efficient decision-making process.

The corporate captaincy

In recent years, sponsors increasingly commit to supporting a transaction but often request that their advisory team lead insurer discussions and  provide advice to the trustees. From a sponsor perspective it’s not an unreasonable ask where they are paying in a contribution and believe  their advisory team will better represent their interests with insurers. This approach can be an appropriate, particularly if a specific corporate governance route needs to be followed, or if the trustee advisory team doesn’t have sufficient experience to support.

However, this approach can risk friction with trustees who need formal advice and would have to appoint the sponsor’s advisers, potentially straining the trustee-sponsor relationship. A robust conflict policy is needed, otherwise trustees could be left ‘high and dry’ mid-way through a transaction.

A further risk is where the sponsor’s focus is on completing the transaction quickly, potentially overlooking the scheme's long-term objectives. In some cases this could result in trustees struggling to meet post-transaction requirements e.g. where data correction requirements were not fully understood. Ensuring trustee input at every stage is crucial to avoid surprises and manage residual risks effectively through any scheme’s wind-up.

Joint navigation strategies

Given some of the challenges around a single corporate driven appointment, it has become increasingly popular to use a ‘co-led’ structure. Historically the domain of larger schemes, more recently this has been adopted by the smaller end of the market. Each party has their adviser who sits on a JWG and are also involved in the market approach and insurer negotiations. This approach can come about when the sponsors and trustees want to receive independent advice and have trusted advisory teams.

The key challenge of this approach is cost, as more hands on deck risk duplicated work and extended negotiations. However, having two advisers may increase pressure on the insurer to perform. Insurers may find the process frustrating if the  objectives are mixed. Establishing a clear protocol for information sharing and negotiation is essential for success.

It’s essential to ensure everyone aligns on the same goals. Advisors competing only causes frustration, delays, and poorer results. Key details, like setting up data-sharing processes and deciding which advisor will handle the data room, also need careful planning.

Role of the Independent Trustee (IT)

Many trustee boards now appoint an IT, either as part of the trustee board or as sole trustee. This role is crucial in setting the overall advisory structure - they know the consultants what works well. Given their experience of completing transactions, they can help ensure a quick and efficient process, enhancing the outcome.

ITs will likely work with the sponsor closely to agree an approach that works for both parties.  

Chairman of PAN Trustees Quote

How to secure the best advisory structure

There’s no right answer to the question “what’s the best advisory structure?”. It depends on the situation and parties involved. At the outset of a bulk annuity transaction project, we work with our clients to identify what approach will work best for them, and to ensure that the other party is supportive to prevent the process from becoming derailed.

Our three top tips, regardless of the structure adopted, are:

• Use an experienced advisory team who know how to run a process and knows the market
• Ensure the different parties involved are working collaboratively to the same goal
• Remember the transaction journey extends beyond the day you sign the deal

Director of DB solutions Quote

If you would like any further advice on this topic, please contact Chris Hawley.