Partners in Confidence: Navigating the buy-out of a small scheme for a large logistics buinsess

The Client: Large transportation and logistics business

Understanding the client challenge

A long-standing client of Quantum Advisory has a number of pension schemes for which we provide consultancy service. As well as ongoing Defined Benefit (DB) and Defined Contribution (DC) arrangements, there was an old legacy Executive DB scheme that had been closed to active members for many years.

We had worked closely with the scheme’s Trustees on their funding and investment strategy to improve the funding level of the scheme. The aim was to buy-out the members’ benefits with an insurer and ultimately wind up the pension scheme.

By 2019, the funding level had improved sufficiently that we determined the scheme would now be able to afford a buy-out without a contribution from the sponsor and therefore advised the client that a buy-out project could commence.

Providing a big name service on a first name basis

In preparation for the buy-in we provided the Trustees with suitable training to ensure that they were comfortable with what a buy-out entailed and the process the scheme would go through. 

Collaborating with the scheme’s legal advisers, an indicative project plan was produced setting out the steps to be completed. This involved a focus on the accuracy of the scheme’s data and governing documentation. 

One challenge was that information on members’ spouses and dependents was not previously held. Therefore, Quantum conducted a communication exercise with the members to obtain any missing data. 

Once the data and scheme documentation were in good order, we approached the market with a request for quotations. For smaller schemes such as this one, there are typically fewer insurers who are interested in quoting, however the preparation work completed by Quantum Advisory for the scheme ensured that it was attractive to insurers – i.e. there were no hidden surprises and a transaction was achievable relatively quickly.

Two competitive quotes from two leading providers were obtained with the final premium resulting in a saving of approximately 10% from the initial buy-out cost estimate. With an excellent price achieved, we worked swiftly with the Trustees and their other advisers to complete the buy-in transaction within 12 months.

Client impact

With the initial buy-in phase complete, the scheme had transferred all of its risks to the insurer –with the attractive premium leading to a small surplus remaining in the scheme. 

• We worked closely with the insurer to validate the scheme data and ultimately hand over the ongoing administration and payroll of the scheme. 
• At the same time we also worked with the Trustees and sponsor to refund the remaining surplus assets to the employer.
• The buy-in policy was then converted to a buy-out and the members of the scheme issued with individual policies from the insurer. With all the liabilities of the scheme now discharged, the scheme could then be wound up.

The project had now been completed on time, within budget and with a positive outcome for all parties involved.

Conclusion

For any scheme looking to buyout in the near future, and particularly for smaller schemes, the main takeaway for trustees is that preparation is key. By ensuring that scheme data is accurate, governing documentation is up to date and there are no nasty hidden surprises, small schemes can achieve a successful buyout.