Transaction objectives and governance

Having a clear purpose and strategy will aid decision making, while having a robust governance structure will allow this strategy to be executed effectively.

• What are the transaction objectives for the sponsor and trustees? Are these aligned?
• Is there a clear timeframe for approaching the risk transfer market? 
• Is the sponsor willing or able to pay a contribution to bridge any funding gap to get the transaction completed?
• How will the expenses relating to the transaction be funded?
• Does the scheme have sufficiently experienced advisers in place to carry out the project?
• Is a governance structure in place to make effective decisions? 

Membership data

The membership data should be of good quality when approaching the market and will need to be fully complete and accurate if the scheme subsequently transfers all of its liabilities to the risk transfer provider. Demonstrating to the risk transfer provider that your scheme’s membership data is of high quality will help your scheme stand out in a crowded market. 

• Do you have a good understanding of the quality of your scheme’s membership data? 
• Are there missing or incomplete data items that could be important for transaction pricing? For example, postcodes, marital status, contingent spouse pension data, etc.
• Is the rectification and reconciliation of GMP benefits complete?
• Has the method for equalising the scheme’s GMP benefits been considered? Will this be undertaken before or after the buy-in phase for a bulk annuity transaction?
• Has a member tracing exercise been completed recently?
• Is mortality experience data easily available to feed into transaction pricing?

Benefit structure and specification

An accurate and complete benefit specification will need to be prepared by the scheme’s legal advisers to support the approach to the risk transfer market. 

• Has the consistency of the scheme’s membership data with the benefit specification been considered? Is there a plan for correcting any discrepancies?
• Are there any complicated benefit structures (for example, underpins, fixed factors, non-standard pension increases) that will need to be considered in advance of the transaction?
• Are there any trustee discretions that need to be codified in the benefit specification to give the insurer precise terms on how to treat these (for example, financial dependants, favourable retirement terms, etc.)?
• Is there a plan for dealing with any sponsor-specific terms (e.g. benefit accrual, salary linkage, etc.)?
• Does the scheme have multiple sections, and is there a plan for dealing with this? 
• Have the various benefit options available to members been considered (e.g. early/late retirement, cash commutation, transfer values)? How will the terms of these options change post-transaction?

Investment strategy

The scheme’s investment strategy will need to be considered in advance of a transaction to ensure that the liquidity and risk profile is consistent with the objectives of the trustees and the sponsor.

• Have the trustees and sponsor taken advice on changes to the scheme’s investment strategy in advance of a transaction? Investing the scheme assets to match transaction pricing will allow the funding position to be locked in and provide greater certainty over any surplus or shortfall.
• Do any changes need to be made to the investment strategy to ensure there are suitable assets to pay any transaction premium? For example, are there any illiquid assets that will need to be dealt with in advance of a transaction? What assets can be transferred directly to the risk transfer provider?
• What timescales have been agreed for implementing any changes to the scheme’s investment strategy?

Liability management exercises

It may be preferable for liability management exercises to be undertaken before a transaction takes place. As well as potentially reducing the ultimate cost of the transaction, these exercises can provide members with options that may not be available to them once the transaction completes.

• Have the potential benefits of a liability management exercise been considered (e.g. bulk transfer value, early retirement, PIE)? 
• If a liability management exercise is beneficial, has this been built into the transaction timeline?
• Has a trivial commutation exercise or winding-up lump sum exercise been considered to reduce the number of members with small benefits in the scheme?

Other key issues

• Are there any historic annuity policies in the scheme that will need to be dealt with?
• Are there any AVC or DC benefits in the scheme? Is there any interaction between these benefits and the main DB benefits? How will these benefits be dealt with as part of the transaction?
• Have any issues relating to trapped surplus been considered, and the options for avoiding this? 
• Has the impact on the sponsor and parent company accounts been considered? 
• What is the strategy for communicating with members?