Bulk Insured Pensions - A Good Practice Guide - NAPF

Bulk Insured Pensions
A Good Practice Guide
September 2011

ABI GOOD PRACTICE GUIDE 3
Foreword
Pension fund trustees are faced with an ever increasing number of major challenges
around scheme funding. Increased scheme longevity coupled with the turbulent
investment environment mean that professional advisers continue to flag the issue
of long term pension risk and the various options available to mitigate that risk. The
spectrum of risk is broad and trustees, along with advisers and corporate sponsors,
must decide where their DB scheme fits and its future direction of travel.
As a contribution to the DB de-risking debate the NAPF welcomes this Good
Practice Guide. It is important that trustees – as fiduciaries acting in the best
interests of all scheme members – should fully understand the key aspects of
the bulk insurance solutions available to them as a de-risking tool. While there
is no substitute for actuarial, legal and risk management advice from qualified
professionals, this Guide can be a helpful source of reference with which to
navigate this one aspect of the complex de-risking process.
Although scheme specific and external factors will impact upon the pace of
de-risking, trustees need to keep under review the options open to them. A clear
presentation of the buy out/buy-in debate is useful in setting out the options and
can provide reassurance that any action taken has been properly thought through.
The NAPF is the leading voice of workplace pension provision in the UK and
represents 1,200 pension funds drawn from all parts of the economy which hold
assets of £800 billion.
Darren Philp
Director of Policy
National Association of Pension Funds (NAPF)

Contents
Executive Summary 5
Introduction 6
Acknowledgements 7
Part I: Buy-in/Buyout Process 8
1. Preparation for Buy-in/buyout 9
2. Approach 15
3. Request for proposal 17
4. Final quotation 20
5. Pre-implementation 26
6. Implementation 33
7. On-going administration 37
Part II: Other Important Considerations 42
8. Impact of the Pension Protection Fund 43
9. Trustee liability and protection 47
10. GMP equalisation 50
11. Data risk transfer 53
12. Longevity insurance 56
13. Liability Management 59
14. Treating Customers Fairly 62
Glossary of Terms 63

ABI GOOD PRACTICE GUIDE 5
Executive Summary
Welcome to this guide to good practice on the subject matter of bulk insured
pension funds and ‘de-risking’.
This guide will
••
give you an overview of some of the options that are available, focusing on the
process of pension scheme Buy-in/Buyout.
••
provide you with some essential preparation objectives of a Buy-in or Buyout, to
facilitate a smooth, speedy and focused process.
••
help you to consider the essential steps necessary for successful completion of a
potentially complicated undertaking.
••
point you towards some of the legal requirements in key areas such as: discretionary
benefits; partial Buy-ins; and the role of the Pension Protection Fund (PPF).
The guide also contains a glossary of terms to help you understand the language
used in Buy-in/Buyout transactions.
Whilst it will not answer all questions that you might have, nor spare you the cost
of collaborating with external advisors etc. We hope this guide will simplify the
decision-making process for you and, in areas where you may have uncertainty,
point you in at least the right direction.
The guide was written by a group of like-minded insurers, employee benefits
consultants, and lawyers, led by Margaret Snowdon of Lucida. On Page 8 you will find
the list of contributors who freely gave their time to produce this document. We are
also grateful for the support of the NAPF, the Pensions Regulator and the PPF.
We hope you enjoy reading this guide, and are always keen to hear your feedback
and any particular views you may have.
Hugh Savill
Director, Prudential Regulation
and Taxation
Association of British Insurers
Darren Philp
Director of Policy
National Association of
Pension Funds (NAPF)

6 ABI GOOD PRACTICE GUIDE
Introduction
The Buyout market is not new, but it has changed over the last few years and not a
week goes by without Buyout being mentioned in the press. In the aftermath of the
financial crisis, Buyout activity has been buoyant with various options and product
offerings available.
On the other hand, trustees have probably never been as confused as they are now
and despite all the press coverage there seems to be little literature available to
explain the how’s and why’s, what Buyout actually means and most importantly
whether or not and by whom it should be considered as a valuable option. But
where should one start?
This guide aims to help trustees and any other interested parties understand the
world of Buyout, explain it in laymen’s terms and set out best practice. Page 9
contains a visual representation of the entire buyout process.
Buyout is a broad term used to cover situations where the assets and liabilities of
a Defined Benefit (DB) pension scheme are taken over by an insurance company.
It is no longer simply the solution of last resort but in many cases has become the
preferred way to transfer risks from a DB pension scheme.
Buyout is considered as the ‘end step’ in a phased de-risking solution, including
liability management exercises (enhanced transfer values (ETV), pensions increase
exchanges (PIE) and enhanced early retirement) designed to provide members with
more choice and improve the funding situation for remaining members.
Buyout can be a very powerful tool in a company’s and trustees’ armoury to
facilitate a corporate transaction, but it is important to understand what one is
(or is not) buying. Choosing the right insurer to help you on this journey, whether
it is a long term de-risking plan or a short term solution to an acute commercial
problem, is therefore pivotal.
Several corporate deals have failed because of the uncertain and volatile liabilities
in a DB pension scheme: the well-publicised J Sainsbury case illustrates the critical
nature of the pension plan in corporate activity.
Insurance companies can provide tailored and innovative solutions to suit your
circumstances and budget, but independent professional advice will always be
needed. This could be from your existing scheme advisers, for example actuary,
consultant, lawyer, etc. but often external experts are sought for their specialist
knowledge of de-risking solutions and the players in the market. Therefore, trustees
and companies must select their advisers with care to ensure they get the right
advice and the right outcome as well as the right value to the scheme.
As expert advice and a clear understanding of all available options is very important
– it should also be in the interests of the trustees to be well informed and not have
to rely on their advisors’ recommendations blindly.

ABI GOOD PRACTICE GUIDE 7
Acknowledgements
We are extremely grateful to the following organisations for giving their
time freely to prepare this guide:
CMS Cameron McKenna
Hymans Robertson
Lane Clark & Peacock
Law Debenture
Legal & General
Lucida
MetLife
Pension Insurance Corporation
Prudential
Tax Incentivised Savings Association (TISA)

8 ABI GOOD PRACTICE GUIDE
Part I: The Buy-in/Buyout process
Preparation
Stake holder
engagement
Understanding
scheme and aims
The importance
of accurate data
Investment
strategy review
Legal
Considerations
Feasibility
••
employer
••
advisers
••
trustees
••
risks faced
••
objectives
••
funding level
••
availability of
extra funding
••
aims of
de-risking
exercise
••
constraints
••
carry out audit
of scheme data
••
assess potential
impact on
availability/
pricing of
de-risking
solutions
••
potential
impact of
scheme’s
portfolio on
pricing of
solutions
••
review of
scheme rules to
check trustee
powers
••
codify the
exact benefits
involved and
the extent
of trustee
discretions
••
possible
solutions
available
••
assess
affordability
••
decision in
principle
to proceed
with Buyout
Quotation Process
Approach
••
consider approach to exercise (full market/auction/bespoke)
Request for proposal
••
use summary data to obtain high level estimated quote
••
complex benefit structures could be simplified at this point
••
typically invite three to five providers to quote
Final quotation (up to eight weeks)
••
provide sufficient scheme information and data to allow providers to produce
accurate quotations
••
record and circulate all updates and agreed assumptions to ensure consistency
of quotations
••
derive shortlist based on all relevant factors
••
engage formally into a mutual exclusivity agreement
Implementation
Pre-Implementation Implementation Ongoing administration and
services (if appropriate)
••
contract negotiation
••
asset transition/disinvestment
arrangements
••
preparing for the transaction
••
data cleansing/verification
••
data migration
••
final premium payment
••
shadow administration in buy-in
••
policy administration in buyout
••
policy holder options
••
valuations
••
monitoring and reporting
••
member communication

ABI GOOD PRACTICE GUIDE 9
1. Preparation for Buy-in/Buyout
“The key to a successful
transfer is to engage
all the relevant parties
from the very early
stages, ensuring
everyone is on the same
level with regard to data
preparation, the review
of investment strategies
and the consideration of
legal aspects.”
••
Transferring pension risks can be complex and involve many stakeholders.
The key to success is the right preparation. This chapter highlights the main
actions and issues that need to be considered.
••
Engagement of all stakeholders from the outset is essential. A working
group consisting of the key stakeholders will help the process run smoothly
and efficiently.
••
One of the first steps is to understand your scheme in terms of the risks
faced and their concentrations, the objectives of the different stakeholders,
the level of funding of the scheme and what, if any, extra funding is available.
Once this is understood it should be possible to outline the aims of the derisking
in the context of any financial and other constraints, to ensure that
the de-risking will deliver the outcome sought.
••
Accurate scheme data is essential to pricing of de-risking solutions. As part
of the preparation prior to approaching the market for quotations, an audit
of the scheme data could be performed and cleansing considered where
data is found to be inaccurate. These steps will improve the speed of
response and comparability of quote from solution providers but will need
to be balanced against the potential costs of delaying a de-risking.
••
Another factor to consider is the investment strategy of the scheme, as the
right strategy put in place before de-risking can reduce the net cost.
••
The trustees must be legally able to complete a de-risking and not prevented
in any way by the Trust Deed, the scheme rules or legislation. The exact
benefits provided under the scheme must be defined. Where there are
discretionary benefits, decisions need to be made on whether, and how, these
are to be converted into entitlements – as insurers will not normally take on
discretionary powers.
••
A feasibility study at the outset provides the opportunity to design and
“test” a solution while ensuring that valuable time and resources are not
wasted. This will ensure the support of all stakeholders is obtained before
a decision to proceed (in principle) is reached and greater expense incurred.
Pension risk transfer, through an insured solution such as a Buy-in or Buyout,
is likely to be a new and potentially one-off experience for many trustees and
employers. It typically involves a complex set of tasks and considerations requiring
interaction between the employer, trustees, their respective advisers, and at a
later stage, the insurer of choice. The key to a successful transfer is to engage
all the relevant parties from the very early stages, ensuring everyone is on the
same level with regard to data preparation, the review of investment strategies
and the consideration of legal aspects. The following section will outline these
considerations in further detail.

10 ABI GOOD PRACTICE GUIDE
1.1. Stakeholder engagement
One of the greatest challenges in a Buy-in or Buyout process is to ensure
agreement between the various stakeholders involved. These can range from
external service providers, such as investment managers and administrators,
to internal parties, such as trustees and employers. Each of the key stakeholders
involved plays an important role in the process as outlined below:
Trustees – The trustees are the key stakeholder in the risk transfer process as they
are the party who will decide whether to go ahead with the Buy-in or Buyout and
will, therefore, select the insurer with whom the pension benefits are to be secured.
Employer – The employer is often required to contribute towards the Buyout or
Buy-in premium or other de-risking costs and thus is an important stakeholder in
de-risking. Insurers may be less willing to engage in de-risking discussions where
an employer has not been involved in the overall process.
Advisers – External stakeholders are also critical to the success of the transition.
They are best involved from an early stage. Asset structure is a key part of any
bulk annuity transaction so investment consultants can play an important role in
assisting trustees in this area. Third party administrators can also be heavily involved,
from providing the data extract on which the insurer will provide their quotation to
liaising with the insurer through data cleansing and on-going administration.
One method of achieving consensus efficiently is to establish a de-risking
working group or subcommittee, which includes representation from the key
stakeholders. It would be advisable to put in place a delegated structure that
avoids the need to consult the full Trustee Board at every stage. Ideally, the
committee would have an “agreed terms of reference” in place under which they
can act, with appropriate delegated authority. This subcommittee would often
ask for a feasibility study to consider the various issues and assess the overall
suitability of an insured solution for pension risk transfer. A specialist benefit
consultant is often well placed to help trustees with this work, which can save
considerable time and energy in the long run.
1.2. Understanding the scheme and aims
Once a subcommittee has been established, with the explicit task of investigating
de-risking options for the pension scheme, one of its first tasks will be to
understand all the various risks faced by the scheme and any risk concentration
that specifically needs to be addressed.
Additional factors that will need to be considered are the risk management,
financial and business objectives of the trustees and the employer, funding levels
of the scheme and any potential additional funding requirement.

ABI GOOD PRACTICE GUIDE 11
To get an accurate view of the scheme’s funding position, the trustees should
review the assumptions used in the valuation of the scheme’s liabilities,
particularly if the mortality assumptions have not been reviewed for some time.
An understanding of the scheme’s main risks as well as an accurate valuation of
the scheme’s assets and liabilities should be sufficient for the trustees to make an
informed decision whether to consider a Buy-in or Buyout.
Larger pension schemes especially may also wish to consider insuring a subset
of liabilities in order to de-risk in stages, either through a quota share approach (for
example a percentage of each member’s liability) or by segmenting the population
by age, category etc.
Following a valuation of the scheme’s assets and liabilities, it is then important for
the trustees and employer to outline their aims vs. any constraints with regard to
the de-risking exercise.
This will have an impact on the structure of the overall exercise, for example, whether
or not full Buyout will become a short or medium term aim and whether there are
any restrictions on funding available from the employer which might limit the extent
of the exercise. Similarly, the employer may have specific aims which have an impact
on timing, i.e. completing the exercise before the financial year-end.
Trustees should discuss these aims and constraints with their benefit consultant at
the start of the process to ensure that the exercise will deliver what is required.
1.3. The importance of accurate data
As trustees are well aware, especially given the focus of the Pensions Regulator,
good data is crucial throughout the life of a pension scheme.
See also the Pensions Regulator’s Guidance on Record Keeping:
http://www.thepensionsregulator.gov.uk/guidance/guidance-record-keeping.aspx
Poor record keeping can lead to significant additional costs in a number of areas
including administration, inaccurate actuarial valuations and even claims from
disgruntled members. For many schemes, the full extent of poor record keeping is only
realised after a major event in the scheme’s lifecycle (for example, when a scheme derisks
or a wind-up is triggered). However, data cleansing at that point is often too late.
In preparation of a Buy-in or Buyout, trustees should carry out a thorough audit of
scheme data to ensure member records are accurate and up-to-date.
Where issues exist, data cleansing should be considered prior to approaching
the market for quotations. This is because poor data can have a number of
effects on the quote process. Inaccurate data can increase the time it takes for
trustees to receive quotations from insurers. It can also affect the ability of an
insurer to issue a formal quotation if, for example, some data items such as
postcodes are incomplete.

12 ABI GOOD PRACTICE GUIDE
“When reviewing
investment strategy
the scheme needs to
balance the long term
investment strategy
vs. potential shorter
term transactional
requirements.”
Moreover, if lack of data requires insurers to make assumptions on data and/
or benefits, which may differ across providers, comparing quotations can be a
near impossible task. An insurer may also add a risk premium to the quotation to
account for the potential additional costs resulting from poor data.
Data cleansing is, therefore, crucial to ensure that trustees can run a competitive
quotation process. However, the benefits of data cleansing should be weighed
against the cost of delaying de-risking activities.
1.4. Investment strategy review
In a phased approach to de-risking, an investment strategy review is typically one
of the first steps taken by pension schemes. When reviewing investment strategy
the scheme needs to balance the long term investment strategy vs. potential
shorter term transactional requirements. For instance, obtaining advice on portfolio
structures that can more easily be transferred to an insurer prior to a Buy-in or
Buyout may be valuable. Investment consultants can assist schemes to put in place
an investment strategy that helps to ensure that scheme assets are structured to
closely mirror Buyout pricing, for example by moving to less risky investments. This
way of de-risking would stabilise the funding level and also assist with an in-specie
asset transfer as part of a partial or full payment of the agreed premium for risk
transfer. This can potentially reduce the net cost of Buy-in or Buyout.
1.5. Legal considerations
A trustee’s role is to act prudently and responsibly whilst operating the scheme in
accordance with the scheme rules. Trustees must at all times ensure they look after
the best interests of their members. While there are many areas of consideration,
ultimately the role comes down to protecting the benefit promises made to the
scheme beneficiaries. That is why it is important that the trustees are knowledgeable
about all the features outlined in their scheme’s documents.
Before Buy-in or Buyout, the trustees should be able to demonstrate that they have
the power to complete the transaction and take legal advice on any restrictions under
the Trust Deed and rules of the scheme or under pension legislation.
The trustees should also review the specific benefits that are to be secured. Where
the benefit structure is complex, for example with different rates of annual pension
increases due to changes over time, the trustees should determine if this contractual
arrangement needs to be replicated or whether there are alternative solutions that
could be considered.

ABI GOOD PRACTICE GUIDE 13
Trustees should note that the current uncertainty surrounding the Government’s
change in policy on the inflation measure from RPI to CPI will have some impact
on investment strategy and de-risking. While RPI hedging is commonplace, there
is no market yet in CPI linked instruments. In the meantime, trustees may wish to
ensure that Buy-in contracts entered into have the flexibility to be restructured for
CPI in future and any cost savings returned to the policyholder. The DWP issued a
Consultation document on the change from RPI to CPI in December 2010, so there
is less uncertainty now than there was, but still trustees will have to await final
legislation before definitive answers can be given.
It is particularly important to consider benefit features which are specifically at the
trustees’ discretion. The insurer will not usually take on any discretionary powers
so a decision is needed as to whether to secure the discretionary benefits as an
entitlement (for example paid for in the premium) or to stop the discretionary
benefit entirely. Ideally, the approach to discretionary decisions should be
determined at the start of the Buy-in/Buyout process with details of these features
to be agreed as early as possible during the set-up phase and then accurately
implemented in a timely fashion.
The trustees will also need to consider whether there are any aspects of their pension
scheme or de-risking activity that would necessitate special requirements.
For instance, in the case of a Buy-in, although insurers are required by regulation to
hold prudent reserves and additional capital to back their guarantees, the scheme
may desire additional security where significant liabilities are secured under a standalone
insurance policy. (See section 4.3 for further discussion of collateralisation.)
Where a Buyout relates to only one particular subset of the scheme (partial Buyout),
trustees will need to consider the impact this may have on remaining members who
will not transfer to the insurer. Two main points should be considered here:
••
Protection offered by the insurer will usually provide more security vs. protection
offered by the residual assets left in the trust.
••
Cost of securing the insurance may outstrip the relevant member’s fair share of the
assets of the scheme.
One way to address this perceived inequity is to establish that there is a sufficiently
strong employer to back the remaining pension promise, as well as asking the
employer to pay part of the premium so that only a fair share of the scheme’s assets
are used.
In the event of a weak employer covenant, it is important to ensure that non-insured
members do not lose out.

14 ABI GOOD PRACTICE GUIDE
“Feasibility provides the
opportunity to design
and “test” a solution
and ensure the support
of all stakeholders
before incurring
significant expense.”
1.6. Feasibility
Buyout exercises can be derailed because of failure to set out a process and lack
of understanding. A feasibility study at the outset helps to ensure that valuable
time and resources are not wasted. Establishing that buyout is the right solution
and understanding how the process will run leads to no surprises and gives greater
confidence in the decision to proceed. Trustees will usually engage an adviser with
the necessary skills and experience to help with feasibility. Having completed
a feasibility study, trustees will find insurers more willing to be involved in the
quotation process.
It is important that the trustees consider the pros and cons of the de-risking
options available so that the decision to buy out is right for the scheme and, once
made, focus can be on getting the right deal at the right time. There are several
variations of buyout solution and trustees should work with their adviser to explore
options to fit objectives and budget. Feasibility provides the opportunity to design
and “test” a solution and ensure the support of all stakeholders before incurring
significant expense.
Finally, a feasibility study allows trustees to consider their budget for the Buyout
exercise, including adviser costs and management time, as well as the potential
premium for the policy. This means trustees can fairly accurately assess the
affordability of buyout and structure the exercise to suit the size and financial
circumstances of the scheme and will be in a position to make a decision in
principle to proceed with Buyout.

ABI GOOD PRACTICE GUIDE 15
2. Approach
••
Once the decision in principle is made to proceed with buyout, the trustees
should agree the approach they will take.
••
Trustees should also set out the objective criteria on which they will base
their decision on the preferred provider.
••
Trustees should take advice on the current state of the market and the
providers, and consider which insurers are likely to have the capacity and
expertise to deliver the best solution when needed.
••
A budget for the exercise should be set out and monitored. This should
include the time expected of trustees and scheme advisers as well as the
likely overall time to conclude a deal.
••
Roles and responsibilities should also be set out including, for example,
who can make decisions and how the final decision on preferred provider
will be made.
Once affordability has been determined and a decision in principle is made to
proceed with buyout, the trustees should agree the approach they will take. This
will include whether a full market review will be needed or if a more focused
exercise is appropriate to the circumstances. For example, will there be an auction
approach based on an initial level playing field for all providers or will trustees seek
a bespoke solution to fit their needs? In the latter, a smaller number of providers
will be involved and perhaps only one for an innovative solution.
Trustees should also set out the criteria on which they will base their decision on
preferred provider, as this ensures the exercise remains focused on factors important
to the stakeholders and the exercise will be more efficient and robust. It is important
than these factors are adequately considered in advance to ensure that the questions
asked of providers are appropriate from the outset. It is also helpful to ensure
providers are aware of the important factors in the selection and that the criteria do
not change as the exercise proceeds. The most common criteria for selection are:
••
Price
••
Structure of offer
••
Ability and flexibility to deal with scheme benefits
••
Financial security of provider
••
Flexibility and efficiency in asset transfer
••
Execution and transition capability
••
Service to members
••
Administration capability and track record
••
Contract/policy conditions

16 ABI GOOD PRACTICE GUIDE
Some criteria may be more important than others, for example, price may be by far
the most important and trustees may wish to weight factors accordingly.
In this planning stage, the trustees should take advice on the current state of
the market and the providers, and consider which insurers are likely to have the
capacity and expertise to deliver the best solution when needed.
The likely timescales should be set out, especially where timing will impact on
asset valuations, annuity pricing and resource availability. It is important that the
subcommittee is able to demonstrate to insurers that a structured timetable is
in place for the process. This allows insurers to plan resource appropriately and
shows that the trustees are seriously considering de-risking.
Wherever possible, timing should be set to take account of major scheme
exercises like a valuation or change of advisers or suppliers. The buyout adviser
can help with project planning and management, unless one of the trustees has
particular expertise.
As it is very easy to spend a lot of valuable scheme monies on large exercises, a
realistic budget for the exercise should be set, agreed by all and monitored by the
trustees. This should include the time expected of trustees and scheme advisers
as well as the likely overall time to conclude a deal.
Roles and responsibilities should also be set out, for example, who can make
decisions and how will the final decision on preferred provider be made? If a full
trustee meeting will be needed, it should be arranged well in advance.

ABI GOOD PRACTICE GUIDE 17
3. Request for Proposal
••
Once the approach has been decided, the next step is to prepare a request
for a bespoke proposal. Typically you might approach 3 to 5 insurers at this
stage for an initial quote.
••
Details of the data needed by the insurers can be found at
http://www.abi.org.uk/Publications/ABI_Publications_Defined_Benefit_
Pensions_and_Insurance_Data_Requirements_a83.aspx
••
Quotations will be more easily comparable if the data provided is as
complete as possible and all insurers are asked to use the same key dates
and assumptions in their calculations.
••
Complex benefit requirements can be simplified at this stage, though
you would want to check that each insurer could cater for the more
complex benefit structure if they were successful.
••
Typically the timescale for an initial quotation is 3-4 weeks, with a more
accurate quotation taking up to 8 weeks.
The next step is to commence work to prepare a request for a proposal or
quotation. It would be typical to approach 3 to 5 insurers at the initial quote stage.
The insurer will require information and scheme data in order to produce the
quotation as, even at this stage, the quotation is bespoke to the scheme. These
requirements can be lengthy and complex and are comprehensively covered in the
ABI Defined Benefit Pensions and Insurance: Data Requirements document:
http://www.abi.org.uk/Publications/ABI_Publications_Defined_Benefit_Pensions_
and_Insurance_Data_Requirements_a83.aspx
If information provided is incomplete or unclear, insurers may make their own
assumptions and quotations may, therefore, not be consistent between insurers.
A good way of minimising the risk of each insurer making different assumptions
is to record and circulate to every insurer any updates or amendments to the
original information/specification provided. This should ensure that each insurer
has a consistent set of information to use. Trustees should ensure that Data
Protection Act 1998 requirements are covered when using identifiable member
data for quotations.
To help compare like for like, all insurers being asked to quote should be asked to
use the same key dates in their calculations (e.g. market conditions date, premium
payment date, risk transfer date). It is also good practice to specify any key
assumptions you want them to make on missing data elements.

18 ABI GOOD PRACTICE GUIDE
“Each insurer’s interest
and capacity to quote
will vary in line with
its own business goals
and objectives, the
availability of capital
and the appetite of any
insurer to utilise this
capital to back annuity
business as well as
resource limitations and
importantly the quality
of the data and benefit
specification provided.”
One way to ensure consistent benefit modelling between insurers is to require that
each insurer submit a quote based on prescribed assumptions, as agreed by the
subcommittee. Any differences between the quotes on the prescribed assumptions
might indicate differences in interpretation of scheme benefits and can be used to
re-scale actual quotations in order to allow for a consistent comparison.
Trustees could simplify some of the more complex benefit requirements at the
initial quote stage and advisers will be best placed to help with this. However,
the benefit consultant would still need to check that the insurers could cater for
the more complex benefit structure if they were to successfully complete the deal.
Typically, the timescale for an initial quotation is 3-4 weeks with a more accurate
quotation taking up to 8 weeks.
There will be a limited number of insurers who are willing to provide a quote at
any one time. Each insurer’s interest and capacity to quote will vary in line with its
own business goals and objectives, the availability of capital and the appetite of any
insurer to utilise this capital to back annuity business as well as resource limitations
and importantly the quality of the data and benefit specification provided. Also,
the more confidence the trustees can give to the insurers that the exercise is a serious
investigation the more likely the insurer would be prepared to produce a quotation.
This can be demonstrated by means of a defined plan, timetable and decision making
process for the investigation and confirmation of sufficient assets to meet the
anticipated costs of the exercise. Only a small number of insurers will be prepared to
quote for quotations below £10 million because of the expense of producing figures.
A typical process would be to:
a. Seek initial quotations (potentially indicative on grouped data) to determine
the affordability of the exercise. Complex benefit structures could be
simplified at this stage. Typically between 3 and 5 insurers are asked to quote.
b. Determine whether the exercise is affordable and worth investigating
further based on the quotations received. If so, move to a second round of
full quotations based on individual data provided to a list of insurers. It is
crucial to provide a full specification and to circulate to all insurers any
subsequent amendments or updates.
http://www.abi.org.uk/Publications/ABI_Publications_Defined_Benefit_Pensions_
and_Insurance_Data_Requirements_a83.aspx
c. Compare the quotations received and draw up a shortlist of insurers to proceed
with further. Criteria for selection could include – price, ability and flexibility to
deal with scheme benefits, ability to customise the solution to meet employer
or trustee needs, financial security of insurer, flexibility and efficiency in asset
transfer, administration capability and record, etc. It is good practice to inform
insurers of the selection criteria in advance, this helps to ensure a more
focused and appropriate response.

ABI GOOD PRACTICE GUIDE 19
d. The scheme trustees should review their timetable, plan and overall strategy
and confirm with the employer that the process continues to have the trustees’
support. It is helpful to inform insurers that the employer and trustees are in
agreement of the strategy.
e. Trustees and their advisors should undertake a thorough and comprehensive
review of the member data and benefit specification. Particular focus should
be on any discretionary powers, benefits for children and dependants and
guaranteed terms for member options within the scheme rules. Some scheme
benefits may be uninsurable and these may need to be converted by the trustees
into benefits that can be insured.
f. Completing the data review at this stage will minimise the possibility of future
fluctuations to the price as a result of changes to data and specification emerging
at a later stage. The process also gives confidence to the insurer that few changes
are likely to emerge in future and thus reduces any uncertainty premium required.
The timescales for such a review will vary depending on the size of the scheme,
the record keeping of the administrators and the length of time since the last
such review was carried out. It should be noted that changing membership data
materially during a quotation process is a major issue for insurers, as it may impact
their assessment of the scheme’s mortality. Trustees should therefore seek to avoid
membership changes through data cleansing and preparation up front.
g. Ideally, at this stage the trustees would share initial asset information with
the insurers so that any asset transition issues can be dealt with in good time.
Sharing this information can allow transition planning to commence and
possibly identify approaches that can reduce the expense of selling assets.
Insurance policy terms should be reviewed and any open questions highlighted
to avoid delay at the final stage. On receipt of the quotations the trustees would
move to the final review stage (see Section 4).
Delays are sometimes unavoidable, but insurers are unlikely to be prepared to
continually update quotations without a full understanding of the reasons for the
delay, as well as an expected timetable to finalising the deal. In these circumstances
it would be advisable to seek broad indicative updates so as to monitor the
affordability whilst maintaining the goodwill of the insurer.

20 ABI GOOD PRACTICE GUIDE
4. Final Quotation
••
Schemes should provide sufficient information and data to allow insurers to
give accurate quotations.
••
It is important at this stage to ensure that the key terms match between
the trustees’ requirements and the potential insurer’s offering.
••
Trustees may wish to consider a collateral arrangement. For short term
Buy-ins leading to Buyout, collateralisation is rarely necessary but this
option may be a more sensible consideration for long-term Buy-ins.
However, it will add additional cost and overlap with protection mechanisms
put into place under the current FSA regime, such as high levels of additional
solvency capital that insurers are required to hold.
••
It is important that trustees undertake due diligence checks on insurers to
ensure that they have sufficient capital to write the business and withstand
potential asset and liability shocks.
••
Final selection of a provider should be based on all relevant factors, including:
– Price
– Structure of offer
– Ability and flexibility to deal with scheme benefits
– Financial security of provider
– Flexibility and efficiency in asset transfer
– Execution and transition capability
– Service to members
– Administration capability and record
– Contract/policy condition review
••
Once a decision has been made it is sensible to engage formally into a
mutual exclusivity agreement to ensure that contracts and asset transfer
arrangements can be finalised confidentially and tie in both parties’
commitment to the successful completion of the Buy-in/Buyout process.
4.1. Agreement on data and benefit specification
During previous rounds of quotations it is likely that questions will have been
raised by the participating insurers on both the data and the benefit specification.
In particular, scheme rules should clearly define the entitlements of any distinct
groups of members, for example executive members, who may have different
entitlements. The final specification sign off should be obtained from the scheme
actuary, legal advisers and administrator.

ABI GOOD PRACTICE GUIDE 21
“At the stage of gathering
final quotations with
a view to finalising the
preferred insurer it is
unlikely that detailed
contract discussions will
take place.”
For the data, the review should check that member numbers are correct, total
pension amounts tally with those expected and revaluation and increase rates are
correctly coded. All data should be up-to-date ensuring all increases to pensions
are applied and member status correctly captured, for example deceased members
should be removed and spouses established as appropriate.
A data verification exercise will follow and further data cleansing is to be expected
as part of implementation. Premium adjustments (to be paid or rebated) in respect
of these changes will become due but should not be significant as long as the more
major issues are eliminated at the final quotation stage.
Quotations received from insurers should also be checked in order to ensure that
these have been produced in line with the required specifications, or are very clear
in what the price covers. The purpose here is to eliminate the risk of the scheme
being asked to pay an additional premium at a later stage.
4.2. Contract/policy condition review
At the stage of gathering final quotations with a view to finalising the preferred
insurer it is unlikely that detailed contract discussions will take place. However, it is
important at this stage to ensure that the key terms match between the trustees’
requirements and the potential insurer’s offering.
4.2.1. Terms for member options
The most important member options are:
• Cash Commutation at Retirement
• Early Retirement
• Late Retirement
• Transfers
The trustees will need to decide whether they want to adopt the insurer’s standard
factors or retain the scheme factors or a hybrid of the two.
An insurance company’s own factors will need to demonstrate the FSA’s Treating
Customers Fairly (TCF) outcomes. These factors may deliver a greater value of
benefit than a scheme’s own factors as pension schemes have tended to base their
factors on higher yielding investment approaches.
With legal advice, the trustees may choose to retain their existing scheme factors,
in which case it is likely that the trustees can negotiate a lower premium from the
insurers reflecting the lower cash flows being purchased.

22 ABI GOOD PRACTICE GUIDE
4.2.2. Surrender terms for Buy-ins
Whether the policy is to be held as a long term Buy-in, or as a transition phase to
Buyout, the trustees may seek to secure future surrender terms.
Insurers are generally reluctant to provide surrender terms but in some situations,
for example on breach of solvency levels, a surrender of the policy may be triggered.
However, this will have an impact on the insurer’s capital, asset management strategy
and reserving, and trustees should expect to pay a premium for this option either
explicitly at outset or as a deduction in the calculation of the surrender payment.
4.3. Collateralisation
Some trustees will wish to consider a collateral arrangement and insurers have
developed structures designed to ensure that, under specified circumstances,
the scheme is able to retake control of its assets rapidly and at a level that meets
the pension liabilities. For short term Buy-ins leading to Buyout, collateralisation is
rarely necessary.
This option may be a more sensible consideration for long-term Buy-ins, however, it
will duplicate protection mechanisms put into place under the current FSA regime,
such as the high levels of additional solvency capital that insurers are required to hold.
Trustees should note that the Solvency II regime is likely to make structures that
allow them to surrender the bulk policy more capital inefficient for insurers and
hence more expensive.
Examples of collateral deals:
• Collateral – where additional funds are held to support the 10% liability not
covered by the FSCS
• Ring fenced pool of assets – where the insurance assets supporting the scheme
are held separately from the other assets of the insurance company. Under certain
circumstances, for example insolvency, a charge can be crystallised and the assets
can be recovered by the scheme.
• Other structures – for example deposit back where the scheme assets are paid
across as part of the premium but they are then deposited back normally with a
third party asset manager to manage as part of a standalone ring fenced fund.
A collateral structure will cost more to reflect the additional costs of the
administration work and the impact of a potentially restricted future investment
environment for the insurer. The Trustees need to understand whether this
additional security is of value taking into account cost, effort, available security
from the employer, the insurer’s reserve capital and the protection of the Financial
Services Compensation Scheme which covers 90% of the insured benefits, leaving
the employer with a residual risk of the remaining 10%. To date, no UK insurer has
ever been unable to pay a contractual annuity payment.
Collateral structures are generally only available on transactions over £300 million.

ABI GOOD PRACTICE GUIDE 23
4.4. Insurance company due diligence
It is important to ensure that the insurer has sufficient capital to write the business
and withstand potential asset and liability shocks.
As all UK regulated insurers fall under the FSA regime, this due diligence is generally
seen as confirmatory and performed upon the preferred insurer only during the
closing stages of a transaction. In the unlikely event that a negative view of the
insurer is formed, the trustees are still able to change their choice. The required
depth of analysis is often perceived to be costly and therefore the approach of
reviewing only the preferred insurer minimises costs.
In some cases, the trustees will review the strength of all relevant insurers, or a
shortlist. In a minority of these cases, a comparison of financial strength will be
drawn, although there is a danger that the comparison is spurious, distracting from
the more important criteria of price and transaction structure.
Information supplied by the insurer may include accounts and FSA Returns. Trustees
should consider appointing a specialist advisor to carry out this aspect of the due
diligence due to the complexity of the information. This advice is normally valuable
to the trustees although an understanding of FSA regulation is often most central
in giving the trustees confidence in their chosen provider.
In particular, trustees should seek information from the insurer on their solvency
level, capital coverage and the basis they use to calculate their reserves.
The External Credit Assessment Institutions (ECAI) can be a good place to start.
They provide an independent opinion presented conveniently under the form of
a standardised indicator. However, trustees should be cautious about any over
reliance on ECAI’s ratings. It is imperative to always consider the most meaningful
sources of information that will allow trustees to form their own opinion. The first
step might be to look at the report issued by the ECAI explaining the rationale
behind the rating. Trustees should always use several sources of information and
apply a critical eye.
Another important set of metrics to consider is the regulatory capital requirements.
Currently, UK insurers are subject to the Individual Capital Adequacy Standards
(ICAS) framework used by the FSA. Insurers are making two separate calculations
known as Pillar 1 1 and Pillar 2 2 , to establish their minimum capital requirement.
Insurers must then hold assets in excess of the higher of these two calculations.
In either case the due diligence review should look at the level of prudence
embedded into the insurer’s reserving basis.
1
Pillar 1 is a prudent deterministic basis with a series of margins built in to provide additional coverage.
2
Pillar 2 looks to capture the true economic value of the assets and liabilities with specific additional allowances
added to cover risks such as operational risks and investment risks.

24 ABI GOOD PRACTICE GUIDE
From the 1st January 2013 the entire European insurance industry will be moving
towards a new risk based and market consistent regime known as Solvency II.
From that point in time the following key solvency indicators will be publicly available
and published on a yearly basis through the Solvency and Financial Condition Report
(SFCR). This report is the public disclosure which is expected to be made available
via electronic publication. The SFCR will be required within either 3 or 4 months
of an insurer’s financial year end. The SFCR must follow a prescribed structure that
CEIOPS developed based on the Framework Directive. The areas covered in the SFCR
are: Business and Performance, System of Governance, Risk Management, Regulatory
Balance Sheet and Capital Management.
The key indicators are going to be the Minimum Capital Requirement (MCR) and
the Solvency Capital Requirement (SCR). The MCR reflects an absolute minimum
level of required capital below which supervisory action will automatically be
triggered. The SCR represents additional capital for firms to hold in order to absorb
significant unforeseen losses.
It is necessary to have a qualitative as well as a quantitative approach to the solvency
assessment of insurers. Several elements should particularly be considered:
• What investment strategy is being followed and does the additional capital being
held reflect the investment risk being taken?
• Demographic and longevity risks: How prudent is the basis being used, how does
that compare to current thinking and what level of shocks can be withstood
before solvency thresholds are breached?
• Level of expense reserves that are being held: Can the insurer realistically continue
to operate effectively with the expense reserve that it is holding and again what
level of increase in internal and third party costs can it withstand.
• Will the insurer continue to participate in the Buyout market into the future?
Once the trustees are comforted that the insurer has sufficient reserves to meet its
existing liabilities into the future, they should then consider future developments.
Trustees should look at current business plans to assess the level of on-going
investment into this sector by the insurer.
Any review should also look at the impact of events in the wider financial services
sector, for example the introduction of reserving changes like Solvency II. Again, a
major impact on an insurer’s balance sheet as a result of Solvency II may mean an
exit from this sector and could lead to a breach of solvency thresholds.
The trustees should also consider off-balance sheet aspects when it comes to the
choice of the preferred insurer and whilst this may seem to play little immediate
significance it can actually add value to the overall Buyout/Buy-in process.

ABI GOOD PRACTICE GUIDE 25
“Once a decision
has been made it is
sensible to engage
formally into a mutual
exclusivity agreement
ensuring that contracts
and asset transfer
arrangements can be
finalised confidentially.”
Key areas to review are:
• Robustness of controls, both financial and operational
• Track record of paying pensions to members/policyholders.
• Quality of service.
• Accessibility for members. Does the administration support multiple
communication channels and mediums?
• Complaint history.
• Evidence of Treating Customers Fairly (TCF).
4.5. Final selection of provider
Following the review process, the trustees will need to make a decision. Using a
matrix against the key selection criteria should allow forming a qualitative and
objective decision. Typical selection criteria would include:
• Price.
• Structure of offer.
• Ability and flexibility to deal with scheme benefits.
• Financial security of provider.
• Flexibility and efficiency in asset transfer.
• Execution and transition capability.
• Service to members.
• Administration capability and record.
• Contract/policy condition review.
A scoring system may be applied where no clear-cut decision seems to
be achievable.
It is important to make sure that all key stakeholders are involved at all times.
Once a decision has been made it is sensible to engage formally into a mutual
exclusivity agreement ensuring that contracts and asset transfer arrangements
can be finalised confidentially. A mutual exclusivity agreement will also tie in both
parties’ commitment to the successful completion of the Buy-in/Buyout process,
but does not represent a guarantee of transacting.

26 ABI GOOD PRACTICE GUIDE
5. Pre-Implementation
••
Contract negotiations are a key part of the process. The terms of the policy
documents will set out the rights and obligations of each party as regards
the insured benefits and risks.
••
Issues that may need to be considered are the extent of cover and liability,
the price calculation, data verification, the insurer’s right to terminate or
adjust cover, buy-in specific points such as data protection responsibilities
and extension to other scheme members, premium payment by asset transfer
and out-of-market risk (the risk of premium changes due to market movements
and funds not being invested in a way which matches market movements).
••
Where a scheme’s assets are ones that the insurer would want to hold
against the liabilities, the out-of-market risk and the costs of liquidating a
scheme’s investment portfolio can be reduced by paying all or part of the
premium by a transfer of assets. This can also include hedges such as
interest rate swaps.
••
On a partial Buy-in or Buyout it is important to identify which assets will
remain with the scheme and the appropriate investment strategy to
support the remaining liabilities.
••
Once trustees have decided to enter a Buy-in or Buyout transaction they
should consider taking the follow steps to ensure the transaction can
proceed smoothly and to timetable:
– finalise the transaction structure before beginning implementation.
– arrange any additional funding required from the employer.
– put in place the plan for communications with member about the changes.
– put in place the plan for approval and execution of documents including
any power of attorney needed.
– ensure the scheme’s fund managers have been given the necessary
notice to disinvest or transfer assets.

ABI GOOD PRACTICE GUIDE 27
“The insurer will be
looking to ensure
that it is taking on
a defined risk only
and will receive a
specific premium in
return for providing a
specific set of insured
benefits.”
5.1. Contract negotiations
Given the number of parties involved, negotiating and finalising the policy terms
and related documents can take some time. The inclusion of extra features, such as
additional security, is likely to increase the time needed for legal negotiations, as
well as the associated advisory costs. Trustees should therefore consider carefully
the additional value added by such features and use suitably experienced advisers
to avoid excessive costs and delays.
Typically, the policy will be made up of a number of documents. The policy terms
contain the detailed legal terms of the policy and set out the rights and obligations
of each party. Whilst subject to negotiation, the policy terms are reasonably
standard for each transaction and across insurers. Specific details for each
transaction are usually contained in the quotation (which contains the mechanism
for calculating the premium) and the schedules attached to the quotation (which
contain a detailed specification of the benefits to be provided and financial data
relating to the benefits payable to each member covered under the policy).
Both the insurer and the trustees will be looking to protect their respective
positions in the policy. The insurer will be looking to ensure that it is taking on
a defined risk only and will receive a specific premium in return for providing a
specific set of insured benefits. Likewise, the trustees will be looking to ensure that
the provider cannot avoid paying the insured benefits and that the premium to be
paid and when is clearly set out.
Some key issues to consider in relation to the policy terms:
5.1.1. Cover and liability
It is crucial that the benefit specification and schedule of membership data are
complete and accurate. These are the key documents to define which liabilities the
insurer is taking on. Trustees often want their administrators and lawyers to review
and approve the final versions of these schedules so time needs to be built into the
process for this to happen. If insurers have raised questions about the benefits or
member data during the quotation process, it is important that any uncertainties or
remaining questions are cleared prior to the signing of the deal.
5.1.2. Price calculation
Having received a quotation, trustees may take some time to review and accept
the terms and conditions laid out, with a further delay also likely before the final
premium is calculated and paid. During that time, market conditions can change
and, as a result, the policy will include provisions that allow the quotation price to
be updated. It is important to understand the adjustment mechanisms and take
advice on whether the scheme’s assets are invested in a way to closely track
these adjustments.

28 ABI GOOD PRACTICE GUIDE
5.1.3. Data verification
A quotation will be provided using the benefit specification and membership data
provided by the trustees. However, that data can often be out of date or unreliable
and in order to ensure that both parties secure the benefits they expect, it is usual
to have a data verification process between the signing of the policy and the
calculation of the final premium.
The policy terms will state how the data verification process will work, including
any relevant timescales. This may require the trustees to provide information on
the insured benefits, so that the insurer can review and confirm that it matches the
original benefit specification provided by the trustees. Where it does not match the
original specification, the policy terms will allow the insurer to adjust the premium
as appropriate. The policy terms and the quotation will also need to state how any
adjustments to the premium are calculated.
5.1.4. Insurer’s rights to terminate or adjust cover
In the event of particular circumstances – which are clearly set out in the body of
the policy – the insurer will have the right to either terminate the policy or adjust its
liabilities/premium(s) payable by the trustees. Such circumstances might include:
••
Significant changes to the insured benefits following data verification.
••
Significant changes to the membership data following data verification.
••
Material changes in market conditions between the date of the quotation and the
payment of the premium (or final premium).
••
Specific changes in the law (for example, any future obligation imposed on the
insurer to equalise Guaranteed Minimum Pensions) – (see Section 7, Other
Considerations); or
••
Other intervening events which have not been taken into account when setting
the premium.
5.1.5. Issues relating to Buy-in
Buy-in Policies are often very similar to the documents used for a Buyout, however,
some additional issues should be considered.
Under a Buy-in transaction, the scheme remains liable to the members and the
trustees will remain the “data controllers” of membership data under the Data
Protection Act 1998. It is therefore in trustees’ interest to ensure that the policy
documentation protects their position as data controllers and that the chosen
insurer has adequate data protection arrangements in place.

ABI GOOD PRACTICE GUIDE 29
Where trustees are putting in place a Buy-in policy, they may want the policy to
specify that it will move to Buyout at some point in the future, with members
being issued with individual policies. The trustees may want to agree the terms of
the individual policies and the insurer may want to be able to charge for issuing
those policies.
Buy-ins will often target one particular group of a scheme’s total membership.
However, as the scheme grows the trustees may want to include provisions that
will allow them to add further members to the policy in the future. Terms and
specifications for this would need to be set out in the policy terms.
The trustees may want to ensure that the Buy-in policy caters for the possibility of
the scheme entering a PPF assessment period (see Section 7).
5.1.6. Premium payment
In order for the insurer to take over liability for the insured benefits as part of a
Buy-in or Buyout, the trustees must pay the premium to the insurer.
The liabilities are assumed by the insurer on the date the premium is paid.
However, in certain cases there may be an opportunity to transfer assets from the
scheme to the insurer as part or full payment of the premium.
Provided the trustees put the appropriate measures in place at the preparation stage
by working with the insurer and the scheme’s investment advisers, there should be no
premium movement between signing the contract and paying the premium.
5.1.7. Out-of-market risk
‘Out-of-market’ risk defines the risk that money is not invested in the “right”
financial market at a time when that market moves in value.
In the context of a Buy-in or Buyout, ‘out-of-market’ risk arises if the premium
changes due to movements in financial markets and the funds being used to pay
the premium are not invested in a way which matches those market movements.
It is particularly relevant where assets held by the trustees need to be sold in order
to pay the premium and there is a gap between selling the assets and paying the
premium, during which the trustees are “out of the market”.
The trustees often have little control over this process. One approach of mitigating
this risk is therefore to reduce or eliminate the time between contract signing and
liability transfer.

30 ABI GOOD PRACTICE GUIDE
“The interest charge is
typically determined
based on the length of
the deferral period and
the amount being prefunded
as a percentage
of the total premium.”
However, the trustees still need to issue instructions to their fund manager to
disinvest in the days prior to payment of the premium and, where there is no gap
between signing the contract and transferring liability; these instructions may have
to be given before final agreement is reached to proceed with the transaction. If
the trustees choose not to issue instructions until the day on which contracts are
signed and liabilities transferred, the assets may not be received until several days
afterwards and, thus, exposing them to out-of-market risk.
To address this issue, it may be possible for the insurer to pre-invest their own
assets on the condition that the trustees sign an agreement to pay the premium
within a specified time-frame (normally between one and five days), providing
evidence that disinvestment instructions have been delivered to their fund
manager. With this approach, there is no ‘out-of-market’ period for the scheme.
However, as there is a cost to the insurer in offering such facility, this may be
factored into the premium calculation or charged as a separate cost to the trustees.
It is also conceivable that a delay in receiving funds could be more than five days,
potentially with a degree of uncertainty about timing. In cases where the majority
of the premium is to be received immediately but the trustees can only commit
to paying the remaining small balance over a longer time-frame, the insurer
may be able to pre-fund this on the basis that interest would be charged on the
outstanding amount. The interest charge is typically determined based on the
length of the deferral period and the amount being pre-funded as a percentage of
the total premium. Understandably, this solution is usually only available while the
scheme is in the Buy-in phase, with the deferred premium being required to be paid
in full prior to conversion to individual policies on Buyout.
5.2. Asset transition
Out-of-market risk can be significantly reduced if all or part of the premium is paid
by a transfer of assets from the scheme to the insurer (in-specie transfer). However,
for this to work, the assets offered by the scheme must be assets the insurer is
willing to accept.
In order for the insurer to complete an assessment on which assets can be
transferred in specie, they will typically require information about the composition
of the portfolio. The insurer will then work in partnership with the trustees, their
fund manager, custodians and advisers to assist with a cash and/or asset transition
strategy in a timely fashion.
In the case of a partial Buy-in or Buyout, it is equally important to identify
in advance the assets that will remain with the scheme, and the appropriate
investment strategy to support the remaining liabilities.

ABI GOOD PRACTICE GUIDE 31
It is likely that the insurer will prefer to accept assets which it would look to hold,
such as corporate or government bonds. The price for these may vary somewhere
between the bid and offer prices available in the market being of benefit to both
the pension scheme and the insurer. Assets which the insurer is less likely to hold
may also be transferred, but usually at the price at which the insurer is able to
immediately sell these onto the open market although other than administrative
convenience, there is no value to transfer these second types of assets.
A mutually agreeable process would usually be devised to obtain prices on all
assets. Large concentrations of a single name, sector or type of asset may require
additional time to liquidate and this delay could increase the costs which the
insurer will incur and will expect to pass on to the trustees. The expected cost can
be estimated as part of the process. Using materially illiquid assets as part of an
in-specie transfer will make agreeing the market value difficult and thereby slow up
the process.
Many insurers are also likely to hold derivatives to hedge risks such as interest rate
and inflation risk. If the transacting pension scheme has hedges, such as interest
rate swaps, in their asset portfolio it may be possible to transfer (also known as
‘novate’) some or all of these to the insurer as part of the premium payment.
Whilst it can be administratively burdensome for the parties involved, there can be
financial savings and investment strategy reasons that make it worth the effort.
5.3. Preparing for the transaction
Once trustees have decided that they wish to enter into a Buy-in or Buyout
transaction, there are a number of actions that they should consider taking to make
the process more efficient.
5.3.1. Finalise transaction structure
During the tender process, trustees will often consider a number of different options
in terms of which members and what benefits are to be covered, as well as how the
premium is to be provided. Trustees need to make a final decision on these structural
issues before they start the process of finalising and implementing the transaction.
5.3.2. Arranging additional funding
Additional funding from the employer is often required before the transaction can
go ahead. Whilst all parties may be fully aware of this fact, it is important to ensure
that the money from the employer is available when needed especially with regard
to market movements.

32 ABI GOOD PRACTICE GUIDE
5.3.3. Member communications
It is important that trustees, together with their consultants and any other
parties involved, plan their communication strategy and timetable in advance
and draft the relevant communications accordingly. Member communications
are a legal requirement as part of a Buyout but may also be required as an
essential part of any Buy-in process.
5.3.4. Approval and execution of documents
There is often very little time between finalising the policy terms and wanting
to proceed with the transaction. Any delay at this point could put the whole
transaction at risk of exposure to adverse movements in financial markets. In
order to proceed quickly, the key players should be ensured for the key periods.
This can be achieved by putting in place a “power of attorney” to enable the
signing on behalf of a trustee if that particular trustee is unavailable at the
crucial time.
5.3.5. Notice to fund managers
The transition of scheme investments is further outlined below. However, one
step to remember as the transaction gets close to signing is to ensure that the
scheme’s fund managers have been given any necessary notices to enable the
scheme to disinvest or transfer assets to pay the premium.

ABI GOOD PRACTICE GUIDE 33
6. Implementation
“Payment of sufficient
premium (in cash
or in-specie assets)
to secure the terms
of the transaction
triggers the start of the
implementation stage.”
••
Payment of the premium will trigger the start of the implementation stage.
The extent of the work that needs to be done will depend on the size and
scope of the transaction and, importantly, whether it is a Buy-in or Buyout.
••
For a Buy-in, particularly where the administration remains with the trustees,
the implementation is usually briefer than for a Buyout.
••
The major issue to finalise is the data for the members included in the
transaction. It is usual for data used for the quotation to have become out
of date due to normal changes over time with any scheme.
••
Therefore data will need to be fully updated and cleansed over time. The time
required to do this should not be underestimated and data verification should
start as early as possible, in the pre-implementation phase is possible.
••
Benefits that are not covered, or were simplified at the quotation stage, will
need to be confirmed and priced with the insurer.
••
The insurer will need to maintain an up to date version of the insured
member data and whichever mechanism is adopted, data transfer from the
trustees to the insurer needs to be secure and comply with all Data
Protection Act 1998 principles.
••
When determining the final premium the insurer should set out in
reasonable detail the price movements between the final quotation and the
final premium. How any surplus or shortfall should be dealt with should be
set out by the trustees who should take legal advice.
••
Policies will need to be finalised and issued once all benefits have been
defined and assets transferred. For a Buyout the issue of policies to members
will transfer the liabilities from the trustees to the insurer.
Payment of sufficient premium (in cash or in-specie assets) to secure the terms
of the transaction triggers the start of the implementation stage. It is during
this stage that all outstanding details need to be resolved – such that the final
documentation, final price and any administrative considerations can be finalised.
The number and the extent of tasks that need to be completed during this
phase vary considerably depending on the size and scope of the transaction and,
importantly, by whether the transaction is a Buyout or a Buy-in.

34 ABI GOOD PRACTICE GUIDE
6.1. Transition
In the case of a Buy-in, particularly where administration remains with the
trustees, the implementation process can be much briefer. In these cases the
insurer may insure streamlined benefits for a known sub-section of the members
and differences in the Buy-in data or benefits compared to those of the scheme
remain the trustees’ liability.
In the case of a Buyout, administration and liability passes from the trustees to the
insurer, and so during implementation it is critical that the trustees ensure that all
outstanding matters are fully communicated to the insurer.
6.2. Data cleansing/verification
The major issue to finalise during the implementation phase is the data for the
members included in the transaction. It is usual for the data used in the quotation
stage to be “out of date” to a certain extent (for example, a member may die just
before the transaction but still be on the scheme data provided for quotation)
and this data will need to be updated and cleansed prior to the liabilities fully
transferring to the insurer. Trustees should not under-estimate the length of
time this can take particularly with members who left service some time ago.
The existence of GMPs can delay matters significantly as these may need to be
reconciled with HM Revenue and Customs (NISPI).
Other matters which may need to be considered at this stage are, for example,
benefits that were either not covered or simplified during the quotation stage.
These benefits would need to be confirmed to the insurer who would also need to
ensure that they could be administered and priced. As discussed earlier, insurers will
not operate discretion and so trustees will need to specify the rules insurers need
to use to administer these benefits.
Ideally this data verification process should start as early as possible and could be
undertaken during the pre-implementation stage; if the data cleanse is finalised
prior to implementation this would help significantly reduce the timescales to
complete the transaction. Data verification can take up to 18 months to complete.
Where the insurer is to take on the responsibility of paying member pensions,
typically one month will be needed for the transition as most pensioners are paid
monthly. A large transaction may require a shadowing process over the few months
prior to the payroll transfer date to give confidence to each party that the required
data has been applied.
Particular care needs to be taken over members who change status immediately
before or after the liability transfer but before the data verification is finalised.

ABI GOOD PRACTICE GUIDE 35
6.3. Data Handling
The insurer will need to maintain an up to date version of the insured member
data, whether or not directly responsible for paying member pensions. To help
with reserving requirements and to check that their assumptions continue to
be valid, as well as to check that payments are being made correctly, the insurer
needs to be informed of pensioner deaths and new beneficiaries added and
will also need to reconcile pension payments made with those actually due.
For Buy-in, the insurer will require regular cuts of the database from the trustees
or, as a minimum, regular reports of changes to that data. In some cases, the
insurer will replicate the member database on their own system. To be able to
ensure the data transfers effectively to the insurer, the insurer will need to ensure
that the data needed for insurance can be transferred easily and without error.
This can be by way of agreed spread sheet reports or defined data extracts via
established electronic interfaces. Whichever mechanism is adopted, data transfer
from the trustees to the insurer needs to be secure and comply with all Data
Protection Act 1998 principles.
Where the insurer provides full administration services, then all relevant data will
need to be migrated fully from the current administrator as part of a specialised
transition plan. This can take up to 3 months to complete. Depending on the
deal agreed, the insurer may also take over historical paper records, but it is more
common for old paper records to be scanned and information updated to the
member files as part of the data verification process discussed above.

36 ABI GOOD PRACTICE GUIDE
“In the case of a
Buyout, the final
phase would be for
the insurer to issue
individual policies
to each member and
hence transfer the
insured liability away
from the scheme to
the insurer.”
6.4. Final premium payment
In providing the final premium the insurer should set out in reasonable detail the
price movements between the final quotation and the final premium. Typically
these should be broken down between market impacts, data impacts and benefit
change impacts.
In the case of a surplus (for a buyout policy only) the methodology of
apportioning the surplus amongst the members would need to be set out by the
trustees taking into account their legal responsibilities.
In the case of a shortfall (for a buyout or a buy-in where the employer is
insolvent), the trustees would need to set out precisely how the benefits were to
be cut back taking into account the wind-up priorities of the scheme and any
over-riding legislation.
In both of the above the insurer would need precise and detailed instructions
from the trustees and would probably seek confirmation that the trustees had
sought legal advice in determining their actions.
6.5. Finalising policies
For a Buy-in there would also need to be a final contract (policy) between the
trustees and insurer setting out precisely the benefits and members insured
under the contract, which may, or may not, match the scheme liabilities (for
example, trustees may have agreed to some reshaping of benefits to enable
insurance or to exclude certain categories of member from the deal on the
grounds of cost). Clearly this policy cannot be issued until all the assets have
been transferred and benefits confirmed.
In the case of a Buyout, the final phase would be for the insurer to issue
individual policies to each member and hence transfer the insured liability away
from the scheme to the insurer.

ABI GOOD PRACTICE GUIDE 37
7. On-going Administration
••
Trustees should consider their administration requirements as part of
selecting an insurer for Buyout/Buy-in.
••
In a Buyout all administrative requirements pass to the insurer.
••
In a Buy-in, the trustee remains responsible for the scheme and insurers
may offer shadow payroll or a payment request approach for dealing with
pension payments.
••
Trustees could choose to delegate some or all administration services to the
insurer in exchange for a premium.
In the event of a Buyout, all administrative responsibility is passed to the insurer;
under a Buy-in, the existing administration arrangements tend to be retained,
although it is possible for trustees to insure the administration services as part of
the deal.
Trustees need to ensure that the administration services provided to their members
will be as good as, if not better, than before Buyout.
It is therefore important that any administration services and additional
requirements are outlined in the selection process, including service standards the
trustees will expect. Trustees should consider the ability of the insurer to fit in with
existing administration processes and where necessary, agree any compromises to
ensure a smooth operation.
7.1. How administration works in a Buy-in arrangement
In a Buy-in the trustee retains responsibility for the running of the scheme,
including member administration, but it is possible to delegate all or some of the
administration services to the provider in return for a premium.
If administration is not delegated and the trustee remains responsible, there are
two ways in which member administration can be carried out.

38 ABI GOOD PRACTICE GUIDE
7.1.1 Shadow administration
The insurer makes an electronic payment of total gross annuity payment due for
the insured population for that pay period (usually monthly) to the trustee’s bank
account. This payment will be the sum of the individual annuity payments due
for each member in that period, based on the member data provided at the final
pricing stage.
The insurer notifies the trustee of how the payment is made up at or around the
same time. Qualifying changes would be known deaths, new dependant pensions
set up, contractual increases, state pension age adjustments and arrears in respect
of reinstated pensions less any overpayments in relation to previous late death
notifications. The balance of any five year pension instalments on death may also
be included. Errors in pension payments will not be adjusted for unless specifically
insured; adjustments that are not notified to the insurer in good time will not
be included in the payment. A timetable for the exchange of data will be agreed
between the trustee, the scheme’s administrator and the insurer at the outset of
the contract.
The trustee (normally via the scheme’s administrator) is responsible for
maintaining member records and providing member data on a regular basis and for
reconciling and accounting for the payments received from the insurer. The trustee
makes the pension payments direct to the members as normal.
The insurer may also wish to monitor the quality of administration services provided
by the trustee, to ensure that payments are made to members in line with the
policy terms.
7.1.2. Insurer to accept a payment request from the
scheme’s administrator
This is a less common, but a straightforward approach based on the insurer making
the payment to the trustee account. The scheme’s administrator is easily able
to notify the amount to the insurer once the payroll has closed. The insurer will
require regular exchanges of member data to justify the payments and will be
responsible for reconciling the requests to payments made. In this approach the
trustee also makes the pension payments direct to the members as normal.
Under both approaches, day to day administration – including the calculation of
dependant pensions and any lump sum payments due on death – remains with the
trustee unless transferred to the insurer. The exercise of discretion in connection
with benefits remains with the trustee, although typically will have been codified
into rules as part of the Buy-in/Buyout process.
In a Buyout, the insurer will be responsible for making the annuity payments direct
to members and for keeping member records up to date.

ABI GOOD PRACTICE GUIDE 39
“How services are
delivered will depend
on the particular insurer,
but most insurers offer
a range of approaches
including telephone, paper,
email and web-based.”
7.2. Communications and relationship with members
In a Buy-in, trustees normally prefer the insurance to be invisible as far as the
members are concerned. Insurers will be happy to remain in the background and
their involvement in member communications in such arrangements will often be
to advise on the style and content of proposed trustee communication to members
about the Buy-in. Insurers can often contribute very effectively to communications
plans and materials, based on their experience of this specialist area.
However, in a Buyout or under certain circumstances in a Buy-in, the insurer will
communicate with members. It is therefore important that trustees are satisfied
with the communication style and approach of the insurer they select.
7.3. Service delivery
The insurer will deliver services to the trustee and/or to members directly according
to the agreement. How services are delivered will depend on the particular insurer,
but most insurers offer a range of approaches including telephone, paper, email and
web-based.
Whichever approach is used by the insurer, it is important that scheme members
feel valued and able to get help or answers quickly with little fuss. Trustees should
consider the administration service carefully when selecting a provider who will
assume responsibility for member services.
7.4. Dealing with transfers, commutation and discretion
Deferred members remain entitled to transfer their benefits to a registered pension
arrangement and may request a transfer value. For a Buy-in policy, the insurer will
provide the trustee with a value based on the benefits insured (although it should
be noted that a Buy-in typically only covers pensioners) and deal directly with
members (policyholders) in a Buyout.
Deferred members coming up to retirement will be able to commute benefits for
cash in line with scheme and HM Revenue & Customs rules with the insurer paying
the relevant sums to the trustee in a Buy-in, or direct to members in a Buyout.
Insurers are unable to apply discretion, therefore any discretionary practices the
trustee wishes to insure will need to be translated into fixed rules and agreed with
the insurer. Trustees can also take the opportunity to convert discretionary benefits
into fixed benefits in consultation with members. The insurer and /or scheme
advisers can help with this.

40 ABI GOOD PRACTICE GUIDE
7.5. Data reporting
Accurate data is essential to the insurance contract. As explained further above, once
the insurance contract is agreed, final data on which the policy will be based is to
be agreed. Following from this, a due diligence process is carried out which may take
anywhere between 6 weeks and 12 months to complete. During that period, the
insurer will require data extracts from the scheme administrator’s system and will
go through a process of reconciling changes against the original pricing data.
7.6. Valuations
In a Buy-in, the insurance policy is an asset of the trustee and will be taken into
account in scheme valuations. The normal approach is for the scheme to take bulk
annuities as being equal in value to the corresponding liabilities. Accounting rules,
such as IAS19 and FRS17 require that the full value of the liabilities is shown prior
to netting off any matching assets. The method should be agreed at the outset
with the insurer and the scheme auditor informed of the approach to be taken.
7.7. Monitoring and reporting to trustees
In a Buy-in, the trustees remain responsible for running the scheme (even if
administration is transferred to the insurer). Therefore, trustees will often ask
insurers to provide regular reports to them and most Buy-ins will benefit from an
annual meeting, for example, between the insurer and the trustees to discuss the
policy and ensure everything is proceeding as planned.
Depending on the method agreed for pensioner payments for a Buy-in,
the insurer will send a schedule of payments to the trustee every month, showing
the gross annuity due for each scheme member.
It is likely there will be regular meetings and reports to the trustee while a scheme
transitions to insured services (whether Buyout or Buy-in) and processes are put
in place to deal with annuity payments. For Buyout cases where the scheme has
not yet wound up, again regular meetings between the insurer and trustee are the
main practice as well as regular updates on progress to the wind up.
7.8. Policy assignment
At the end of a Buyout process, the scheme will be formally wound up with
benefits being assigned to individual members accordingly. Members will
ultimately become policyholders of the insurer in their own right. This process
can take up to two years from the date wind up commences, depending on
the quality of data and complexity of the benefits. It is also possible to issue
individual policies to members in a Buy-in arrangement, provided the Trust Deed
and rules and policy permits such an undertaking.

ABI GOOD PRACTICE GUIDE 41
7.9. Dealing with mistakes
Mistakes do happen, though they should be rare and tried to be kept at a minimal
level. Mistakes could be due to poor data quality or a misalignment of data held
by the trustee and the insurer. Mistakes can be minimised by ensuring effective
and regular transfer of data to the insurer, and also by regular reconciliation of
payments made and due. Common and avoidable mistakes are, for example, late
notification of deaths and failure by the trustee to reclaim overpaid instalments.
Insurers will expect all overpayments to be reclaimed unless agreed otherwise.
By having a mechanism to deal with mistakes set out in the agreement, handling
errors becomes more straightforward.
7.10. Complaints handling
Regulated insurance companies are required to have suitable procedures in place
to handle policyholder complaints. Complaints should be few in number, but if
and when they do arise, it is important that they are handled efficiently and
fairly. The ‘definition of complaint’ should generally cover: providing incorrect
information, poor communication, failure to apply policy terms, paying incorrect
benefits and poor service levels. Insurers should clearly set out their procedure for
dealing with complaints and will typically include:
••
timescale to resolve straightforward cases (typically by next working day).
••
timescale to resolve more complex complaints (within 5 working days).
••
what happens if cases cannot be resolved in the normal timescales.
••
what to do if the complainant disagrees with the insurer’s decision.
••
the role of the Financial Ombudsman Service (and where appropriate,
the Pensions Ombudsman Service).
Insurers will also use the complaint process to spot trends or issues that may
affect other policyholders and members should be kept informed and fairly treated
throughout the process.
7.11. Optional administration services
It is possible for the insurer to provide additional administration services, for example,
member tracing, mortality checking and member communication services. The insurer
will be able to make payments direct to members if the trustee so wishes. The insurer
may also attend trustee meetings on a regular basis and will provide reports to the
trustee if required.

42 ABI GOOD PRACTICE GUIDE
Part II: Other Important Considerations
Trustee liability
and protection
Impact of the pension
protection fund
GMP equalisation
Other Important
Considerations
Data risk transfer
Longevity insurance
Treating customers
fairly

ABI GOOD PRACTICE GUIDE 43
8. Impact of the Pension Protection Fund
“Insurers are developing
policies flexible enough
to meet the needs of
trustees who want to
secure member benefits
during an assessment
period through a Buy-in.”
••
The Pension Protection Fund (PPF) will pay compensation to a scheme’s
members if the scheme cannot afford to meet its liabilities. Payments are
capped and in most cases payments are less generous than the scheme
would have provided.
••
Before making compensation payments the PPF will investigate schemes
to decide if they can be rescued. The period of investigation is known as an
assessment period.
••
During an assessment period trustees must be reduce benefits to the level
of compensation the PPF would pay.
••
For a Buy-in it is common to specify within the policy terms what happens
should a PPF assessment period begin, otherwise the policy will pay at the
full rate of benefits whilst the trustees are permitted to only pay at the
reduced PPF levels. Options include allowing the full or partial surrender of
the policy or applying the surplus to other scheme purposes.
••
If the scheme is taken on by the PPF at the end of the assessment period it
will automatically take over any policy not surrendered. If the scheme is not
taken on the policy will remain between the insurer and the scheme. Usually
the scheme will then wind up and the policy should say, at least in outline
what should happen to any benefits not paid in full.
••
Insurers are developing policies flexible enough to meet the needs of
trustees who want to secure member benefits during an assessment period
through a Buy-in.
••
For a Buyout any benefits secured will not be part of the scheme and so will
be unaffected by an assessment period.
••
Once in an assessment period trustees may be able to enter a Buyout to
secure member benefits, but the agreement of the PPF will be needed and
they will usually to be sure that benefits will be higher than the PPF level.
It is important to understand what might happen to a Buyout/Buy-in policy if
the scheme were to enter the Pension Protection Fund (PPF) or start a PPF
assessment period.

44 ABI GOOD PRACTICE GUIDE
8.1. What is the PPF?
The PPF came into existence back in 2005 following a number of high-profile
examples of companies getting into financial difficulties and leaving their pension
schemes badly underfunded. As a result, if employers sponsoring a final salary
scheme become insolvent the PPF will pay compensation to the scheme’s members
if the scheme cannot afford to pay that compensation itself.
Broadly speaking, members of schemes that have reached their normal retirement
age under the scheme rules will receive 100% of the benefits they were entitled
to and other members will receive 90%. However, the PPF operates an annual cap
on the amount of pension compensation it will pay to each member and in most
cases future pension increases provided by the PPF will be less generous than the
scheme would have provided.
8.2. Assessment periods
Before the PPF confirms that it will pay compensation to members of the scheme it
must decide if the scheme can be rescued, for example, if the employer comes out
of insolvency and can support the scheme again, or whether the scheme can afford
to pay benefits at least as high as the level of PPF compensation to members. This
period of investigation is known as an assessment period.
An assessment period starts when the employer becomes insolvent. There is no
minimum or maximum length of assessment period; however the PPF normally
expects assessment to be completed within 2 years.
During the assessment period, benefits must be reduced where necessary to match
the level of PPF compensation and pension increases must be limited to the level
provided by the PPF.
Although trustees remain responsible for running the scheme during a PPF
assessment period certain restrictions are automatically imposed on what the
trustees can do and the PPF has power to direct certain actions to be taken by the
trustees. For example, no new members will be able to be admitted to the scheme
and trustees will be unable to discharge liabilities to members (unless agreed by
the PPF).

ABI GOOD PRACTICE GUIDE 45
“Insurers are developing
increasingly sophisticated
products focused on
the trustees’ flexibility
to adjust the “shape” of
benefits to a level where
benefits are still higher
than the PPF level.”
8.3. Buy-in: implications of PPF assessment
As a Buy-in contract will typically be entered into whilst the employer remains in
place, there is always the risk that the employer goes into insolvency and a PPF
assessment period starts whilst the trustees are holding the Buy-in policy.
It is common to state within the policy terms what happens should a PPF
assessment period begin. Otherwise, the policy will continue to pay full
benefits whilst the trustees are required to pay only reduced PPF level benefits
to the members.
Options that thus might be agreed with the insurer include allowing:
••
either the trustees or the insurer to surrender the policy after an assessment
period is triggered.
••
the Insurer to surrender the policy if the scheme goes into the PPF at the end of
the assessment period.
••
a partial surrender of the policy when an assessment period begins or the scheme
goes into the PPF for benefits to be reduced to PPF levels and benefits above that
level to be surrendered.
••
the trustees to require the insurer to reduce benefits paid directly to members to
the PPF level, with the remaining balance to be paid to the scheme.
••
the trustees to require the insurer to reduce benefits of the current insured
members to the PPF level, and add additional members under the policy on
agreed terms up to the value of the benefits given up.
If the Buy-in policy covers certain additional voluntary contribution benefits
or transferred-in benefits which fall outside the scope of PPF compensation,
the trustees may also want the right under the policy terms to be able to separate
those benefits from the rest of the benefits covered by the PPF.
Assuming the policy is not surrendered during the assessment period – by
transferring the scheme to the PPF – the PPF will automatically take over the
contract at the end of the assessment period.
If the scheme is not taken on by the PPF, for example better funded than the PPF
level of benefits, the policy will continue between the trustees and the Insurer, but
the scheme will usually have to wind up.
In those circumstances, the trustees may still not be able to pay members the full
benefits under the policy and so the policy should state, at least in outline, what
should happen to those benefits.
There is also a growing market in trustees wanting to purchase a Buy-in policy
during the assessment period. Insurers are developing increasingly sophisticated
products focused on the trustees’ flexibility to adjust the “shape” of benefits to a
level where benefits are still higher than the PPF level.

46 ABI GOOD PRACTICE GUIDE
8.4. Buyout: implications of PPF assessment
Benefits already secured under a Buyout will not be part of the scheme when an
assessment period starts. Individual member Policies and their benefits will not be
affected by the assessment period.
Once a scheme is in assessment the trustees cannot discharge liabilities to
members by purchasing Buyout policies unless the PPF agrees. In practice, the PPF
will want to be sure that the scheme can successfully exit assessment with benefits
above the PPF level before allowing any Buyout to proceed.
That does not mean that the trustees cannot consider possible Buyout terms
(indeed the PPF may well encourage them to do so as assessment is coming to an
end). However, both insurer and trustees will want to be sure that the PPF does not
object to the proposed Buyout terms.
One possible problem is created from the fact that the method used by the PPF
to value the benefits during the assessment period is not the same as the method
used by insurers to price a Buyout. As a result, a scheme could find itself in the
position of being overfunded on the PPF basis, so that the PPF will not take over
the scheme, but not having sufficient assets to secure more than PPF level benefits
in the Buyout market. The trustees advisers should try to identify if this might be
the case during the assessment period and the position should be discussed with
the PPF. Trustees must avoid the situation where they are seen to be “gaming” the
PPF by securing some member benefits fully through Buyout at the expense of
others, and notably at the expense of the PPF.

ABI GOOD PRACTICE GUIDE 47
9. Trustee Liability and Protection
••
Securing benefits via a Buyout or Buy-in policy raises particular issues which
the trustees need to consider in relation to trustee liability and protection.
••
Under a Buy-in, if the insured benefits purchased do not match the scheme
benefits payable, any gap will need to be made up by the trustee, whose
liability is unaffected by the insurance policy.
••
The policy terms are likely to contain warranties and indemnities that
trustees are required to give to the insurer, for example in the case of
claims that arise as a result of errors in the data. Trustees need to consider
carefully these warranties and how to manage their risk of liability under
any indemnities.
••
Under a Buyout the liabilities will be very different. The purpose of a Buyout
is to transfer the trustees’ liabilities to provide scheme member’s benefits
to the insurer. Trustees will, however, remain liable for past decisions and
should ensure they have continued protection against historic liabilities.
The insurer will only be liable for benefits secured by the buyout policy and,
although the procedures described in this document should minimise any
risks, trustees will continue to face a risk of having secured the wrong
benefits or no benefits for some members.
••
Once a full Buyout has taken place there will be no scheme assets which
can be used to indemnify the trustee, therefore, if the Trust Deed permits,
trustees may wish to consider the purchase of “run-off” and missing
beneficiary insurance.
Trustees of pension schemes take on demanding duties when they are appointed.
It is therefore important for them to understand what potential liability they face,
whether collectively or individually, and what protection they have against that
potential liability. Securing benefits via a Buyout or Buy-in policy raises particular
issues which the trustees need to consider in relation to liability and protection.
The starting position for any trustee is that they are technically liable for all their
acts as a trustee. If a trustee body is made up of a group of individual trustees,
those individuals are liable for their actions.
If the trustee body is a company acting as trustee, with decisions taken by a
board of directors, it is the company which is liable for its acts as trustee (but the
directors might be liable to the trustee company if things go wrong).

48 ABI GOOD PRACTICE GUIDE
“It is important to
remember that a Buy-in
does not discharge the
trustees’ liability to pay
benefits to members.”
Pension schemes typically have in place a range of protections for trustees.
The common protections offered are summarised as:
••
Trustees may be exonerated (for example let off) liability by a term in their
Trust Deed.
••
Trustees might be protected by an indemnity from the employer so that the
employer has to pay any personal liability of the trustees.
••
Trustees might be protected by an indemnity from the assets of the scheme so
that the assets of the scheme have to pay any personal liability of the trustees.
••
The scheme might have trustee liability insurance in place.
••
The employer might have insurance in place which covers the trustees/directors
of the trustee company.
••
In some circumstances the Courts can excuse a trustee from liability.
It is important to bear in mind that all of these protections have limitations. For
example, trustees are unlikely to be able to benefit from an indemnity under their
scheme in cases of fraud or wilful disregard of members’ interests (it is important
to check the precise provisions of the Trust Deed and rules in each case). Legislation
also restricts how far trustees are able to rely on certain protections, particularly in
relation to investment decisions. It also prevents the scheme assets being used to
provide protection (including insurance) against certain liabilities (for example fines
from the Pensions Regulator).
9.1. Trustees’ liability under a Buy-in
It is important to remember that a Buy-in does not discharge the trustees’
liability to pay benefits to members. It simply means that they have purchased an
investment which they expect to meet that liability. Therefore if the insured benefits
purchased do not match the scheme benefits payable, any gap will need to be made
up by the trustee, whose liability is unaffected by the insurance policy.
The policy terms themselves are likely to contain warranties and indemnities that
trustees are required to give to the insurer – for example, accuracy of the data
vs. claims that arise as a result of errors in the data. It is important that trustees
consider carefully these warranties they are asked to give and how to manage their
risk of liability under any indemnities.

ABI GOOD PRACTICE GUIDE 49
9.2. Trustees’ liability under a Buyout
The trustees’ liability considerations under a Buyout scheme are very different to
the ones of a Buy-in. The purpose of a Buyout is to transfer the trustees’ liability (to
provide members’ benefits from the scheme) to the insurer.
Trustees must follow any specific provisions in the scheme rules about the discharge
of benefits by buying them out and complying with the requirements in legislation.
It is important that trustees obtain a discharge against any future liability when they
decide to so for the benefits secured under the Buyout policy. However, trustees will
still remain liable for any past decisions they have taken and should therefore ensure
they have continued protection against any such ‘historic’ liability.
It is important to remember that once a full scheme Buyout has taken place there
are no scheme assets which can be used to indemnify the trustees. Any right of
indemnity against the employer is only possible if the employer is solvent and able
to meet that indemnity.
It is therefore desirable to consider “run-off” insurance to cover the trustees even
after the scheme has wound up. This type of liability insurance must be provided
by a general insurer. Under a Buyout policy, the insurer will only agree to cover the
insured benefits stated in the policy terms. Trustees therefore continue to face a
risk of having secured the wrong benefits, or perhaps having failed to secure the
benefits for some of their other members.
Although the likelihood of this happening in practice should have been greatly
minimised by data verification, it remains appropriate for trustees to take steps
to ensure that this residual risk is dealt with. This is particularly the case where
following a Buyout the scheme itself may terminate and any recourse that the
trustees might have had to the scheme’s assets to protect them against liability
has fallen away.
It is common practice for trustees who are buying out benefits and terminating
the scheme to try to obtain protection from future claims by members and other
beneficiaries by issuing notices under section 27 of the Trustee Act 1925. By issuing
these notices, the Trustee Act 1925 protects the trustees from future claims from
people they did not know of thus averting any unprecedented future claims. It is
also common to obtain insurance cover for any missing beneficiaries, providing
wider protection than any notices issued under the Trustee Act.
Before proceeding with the purchase of missing beneficiary insurance or run-off
liability insurance using scheme assets, trustees should carefully check their Trust
Deed to confirm that they have the power to purchase this insurance.

50 ABI GOOD PRACTICE GUIDE
10. Guaranteed Minimum Pension
(GMP) Equalisation
••
On a Buy-in or Buyout it is likely the insurer will exclude liability for GMP
equalisation, although some will provide cover for this risk.
••
Where it is not covered, the liability for any claims relating to GMP
equalisation will remain with the trustee. Trustees may therefore seek to
equalise GMPs prior to a Buyout or to shift the obligation to equalise to the
insurer in return for an adjustment to premium.
••
Trustees should take legal and actuarial advice about GMP equalisation and
decide the most appropriate approach for their scheme.
Guaranteed Minimum Pensions (“GMPs”) are a benefit provided by schemes that
were contracted out of the State Earnings Related Pension Scheme (now the State
Second Pension) between 6 April 1978 and 5 April 1997. In return for the member
giving up this state pension, and paying lower National Insurance Contributions,
the scheme had to provide a guaranteed minimum level of pension to the member.
As they replace benefits under the state scheme, GMPs are subject to statutory
protections that do not apply to other Scheme benefits. For example, GMPs have
to be re-valued before they come into payment and increased accordingly once
in payment. This has to be in line with statutory rules and in most cases that
revaluation must increase the total benefit of the member, for example it cannot
be “franked” against the rest of the member’s pension.
10.1. Equal treatment requirements and GMPs
GMPs are calculated by reference to the state pension age, which means they are
payable from age 65 for men and 60 for women. Whilst this is clearly discriminatory,
it is what the GMP legislation requires and it is not possible to equalise the GMP
benefit itself because that would not comply with the GMP legislation.
However, both UK legislation and EU law require occupational pension schemes to
provide equal benefits for men and women for benefits built up since 17 May 1990.
This requirement applies to the member’s total benefits from the scheme. If the
member’s GMP causes the total benefit to be unequal (for example as a result of
different rates of revaluation or pension increases), it is arguable that the scheme
must equalise the impact of the GMP. As a result, when people talk about “GMP
equalisation” it is not the GMP itself that is equalised, but rather the impact of
GMP on a member’s total benefits.

ABI GOOD PRACTICE GUIDE 51
“Trustees will often seek
to equalise GMPs prior
to a Buyout or shift the
obligation to equalise
to the insurer (in return
for an adjustment to
the premium).”
Most occupational pension schemes have tried to equalise their normal retirement
age but very few have tried to equalise the impact of GMPs. One reason for
this is that it is not certain that there is a legal obligation to do so. It is arguable
that, because the inequality is caused by complying with GMP legislation,
the discrimination is indirect and justifiable – and therefore is not illegal. Even
the Pensions Regulator (in its previous guise as OPRA) acknowledged that there
was no clear obligation on trustees to “equalise benefits where inequalities arise
only from the impact of contracting out legislation”.
However, more recently the PPF has decided to equalise the GMPs of schemes
entering the PPF and in 2010 a Government Minister announced (albeit only in the
context of the Financial Assistance Scheme) that “it is the Government’s opinion
that, in order to ensure full compliance with European law, trustees and others
should act as if existing domestic legislation requires equalisation in respect of
differences resulting from GMPs”.
On Buyout or Buy-in, it is likely that the insurer will exclude liability for GMP
equalisation, although some will be prepared to cover this risk. Where it is not
covered, the liability for any claims relating to GMP equalisation will remain with
the trustees, even where all other benefits have been discharged. Trustees will often
seek to equalise GMPs prior to a Buyout or shift the obligation to equalise to the
insurer (in return for an adjustment to the premium).
10.2. Methods of equalisation
Another reason for very few schemes to have equalised is that the process is
complex and expensive. Furthermore, there seems to be not enough information/
guidance on the correct procedure of such an undertaking. As a result, without
statutory guidance, there is a risk that any GMP equalisation exercise will prove to
be invalid.
Both the Regulator and the PPF recognise that there are different approaches
that could be taken to GMP equalisation: for example, where a scheme was in
wind-up and was underfunded, the Pension Regulator would suggest that it may
be reasonable for the trustees not to equalise GMPs. Even where schemes did
decide to equalise, it recognised that if trustees used one of the many methods
of equalisation suggested the Pension Regulator would “be reassured that they
are acting honestly and reasonably”. Of course, that does not mean they have
complied with any legal duty to equalise the benefits.
In the past, the Pension Regulator provided a number of methods that it deemed to
be reasonable. These methods were also included in a PPF discussion paper on this
subject: http://www.pensionprotectionfund.org.uk/DocumentLibrary/Documents/
gmp_consultation_april_2008.pdf
These methods fall into two broad approaches. One looks at the issue on a static
basis, carrying out a one off equalisation exercise; the other takes an on-going,
year-by-year approach.

52 ABI GOOD PRACTICE GUIDE
10.2.1. Static basis
This approach takes the overall actuarial valuation of the benefits or the
total amount of the benefits for each member at a certain point in time and
compares it with a value/amount that they would be entitled to if they were
of the opposite sex. The higher value/amount is then used.
10.2.2. On-going basis
This approach requires a year-by-year comparison of a member’s benefits with
those provided if the member were of the opposite sex, and increasing benefits
each year as appropriate.
Trustees should take legal and actuarial advice about the issue of GMP
equalisation and decide the most appropriate approach to take for their scheme.

ABI GOOD PRACTICE GUIDE 53
11. Data Risk Transfer
••
One third of defined pension schemes are like to have data errors. Poor data
is an invisible risk that can significantly increase pension scheme costs.
••
Buyout and other risk transfer strategies present an opportunity to clean up
data and get some benefit in return, but data cleansing should be considered
well in advance of any buyout strategy rather than factored into pre-buyout
work as this can add considerably to the time required to complete the Buyout.
••
Correct data is important but it can be verified and corrected after the
insurance is in place to ensure the right benefits are insured and paid.
••
As an alternative, trustees may want to pass the data risk to the insurer for
a higher premium or self-insure the risk by setting aside a fund for the
purpose or agreeing to include the liability in the valuations to ensure
funding over the longer term.
••
Before asking the insurer to cover data errors, trustees should check whether
or not this risk is already covered by an existing indemnity insurance policy.
Poor data is an invisible risk that can significantly increase pension scheme costs.
One third of all defined benefit schemes are likely to have data errors, some leading
to higher costs sooner or later. A general rule of thumb is that the older a scheme
and the more complex the benefit structure is, the greater the data risk trustees
may face. However, other factors also play a part (see the checklist below for a list
of those factors).
The Pensions Regulator has recognised the importance of good data for pension
schemes and is encouraging schemes to take action on common data initially (for
example name, date of birth, sex and address) and on conditional data later, (for
example data consistent with member status and events).
Many firms offer a wide range of data analysis services, whilst some companies
target their analysis to fit with the regulator’s approach. Analysis is relatively low
cost and is vital to identify the areas of cleansing that will make a difference.
However, it is important also to recognise that some information just cannot be
found, certain “known unknowns” and “unknown unknowns” will therefore have to
be accepted.
Trustees will need to prepare themselves that a certain percentage of benefits will be
wrong and either set funds aside accordingly to cover these cases, or allow for it in
during the valuation process anticipating some extra cost on Buyout.

54 ABI GOOD PRACTICE GUIDE
“Self-insurance means
accepting responsibility
for benefit errors or
missing beneficiaries
uncovered in future
and could be paid for
by asking the employer
to set aside a special
fund for the purpose or
agreeing to include the
liability in the valuations
to ensure funding over
the longer term.”
11.1. Data de-risking
Data cleansing is a de-risking strategy in itself, and is being actively encouraged by
the Pensions Regulator, but it should not get in the way of a decision to insure or
not. Buyout and other risk transfer strategies present an opportunity to clean up
data and get some benefit in return, but data cleansing should be considered well
in advance of any buyout strategy rather than factored into pre-buyout work. Data
cleansing as part of the Buyout process adds considerably to the time required, and
could result in missed market opportunities and much higher costs in the long run.
Correct data is important but it can be verified and corrected after the insurance is
in place to ensure the right benefits are insured and paid.
As an alternative, trustees may want to consider passing the data risk to the insurer
for a higher premium, as explored further below, or overtly self-insure the risk. Selfinsurance
means accepting responsibility for benefit errors or missing beneficiaries
uncovered in future and could be paid for by asking the employer to set aside a
special fund for the purpose or agreeing to include the liability in the valuations to
ensure funding over the longer term. Some analysis of the risk will be necessary to
ensure the right funding arrangements are in place. Plans will need to be put in place
to correct the data to satisfy the regulator in the longer term.
11.2. Insuring the risk
As mentioned above, it may be possible to get peace of mind through insuring
against data risk on transfer to a bulk annuity policy. In return for an additional
premium, some insurers are prepared to cover the scheme for data errors and/
or missing beneficiaries. Trustees’ concerns about data errors then become the
responsibility of the insurance company.
The cost of this insurance will depend on a number of factors, including: age and
complexity of the scheme; number of times administrators and providers have
changed as well as a status quo on current work done regarding data analysis and
cleansing. Evidence of general good governance in the scheme will also help to
keep the premium down.
Insurers will carry out due diligence to check that member records are complete,
reasonable and will inform the trustees of any inconsistencies. Based on their findings
and the trustees’ response, the insurer will take a view on whether or not they will
insure data risk and if so at what premium level. The cover will be set out in the policy
document or contract and trustees should ensure it covers what they require.
As a guide, cover would normally be for data errors found later which result in an
increased benefit entitlement under the scheme rules. The insurer will normally
offset increases against decreases, as errors can work both ways.
The insurer is unlikely to pay for increases caused by maladministration by the
scheme administrator, as trustees would be expected to seek redress from the
provider. The insurer is also unlikely to cover increased benefit claims that cannot
be evidenced in some way.

ABI GOOD PRACTICE GUIDE 55
Few, if any, insurers will provide protection against the risk of future GMP
equalisation, and the premium for such insurance will tend to be very high.
Before asking the insurer to cover data errors, trustees should check whether or not
this risk is already covered by an existing indemnity insurance policy.
The more factors below that apply to the scheme, the more data risk faced:
••
The scheme is more than 10 years old.
••
The scheme is large (over 1000 members).
••
The scheme benefit basis is complex (hybrid, contracted out).
••
The administrator holds paper files outside of the computer system.
••
Scheme members are at multiple employment locations.
••
The benefit basis has changed more than once.
••
The administration system was changed more than 3 years ago.
••
The scheme administrator has changed.
••
The pensions manager has changed in the last 5 years.
••
The operating location has changed in the last 5 years.
••
The employer has bought and/or sold other companies.
••
The scheme has never had a formal data audit.
••
The scheme has taken no steps to cleanse member records.

56 ABI GOOD PRACTICE GUIDE
12. Longevity Insurance
••
Longevity insurance is a means of transferring mortality, longevity and
demographic risk from a pension scheme to a third party – typically an
insurer, reinsurer or an investment bank.
••
The pension scheme agrees to pay the third party a fixed set of monthly
instalments, and in return the third party agrees to pay the actual monthly
pension instalments to the pension scheme over the duration of the
contract. Both legs will normally rise with inflation, meaning that the
inflation risk remains with the pension scheme.
••
Typically only pensioners in the course of payment (together with contingent
benefits) are covered and dependants and deferred members excluded.
••
Unlike a Buy-in/Buyout contract, there is no up-front premium, so the
pension scheme retains control of its assets but has the contractual
obligation to meet the fixed-leg instalments when they fall due.
••
The contract will be collateralised to provide protection to either party in
the event of a default by the other party.
The past few years has seen the advent of a new approach to de-risking pension
schemes with a number of high profile completions already taken place in 2009 &
2010. For example, the £3 billion transaction between the BMW pension scheme
and Deutsche bank (via its subsidiary Abbey Life) in Q1 2010 and the £750 million
transaction between the Royal County of Berkshire pension scheme and Swiss Re
in Q4 2009.
Longevity insurance is a means of transferring mortality, longevity and demographic
risk from a pension scheme to a third party – typically a (re)insurer or an
investment bank.
Under such an arrangement, the pension scheme agrees to pay the third party
(for example an insurer) a fixed set of monthly instalments (the “fixed leg”), and
in return the insurer agrees to pay the actual monthly pension instalments (the
“floating leg”) to the pension scheme over the duration of the contract.
Typically, both the fixed and the floating leg would increase with the actual pension
increases of the scheme. This would also be the case for increases linked to variants
of RPI, for example LPI, with both legs increasing with the actual level of RPI (or its
variants) over the period.
This means that the RPI risk is retained within the pension scheme and not
transferred to the insurer with the other risks.

ABI GOOD PRACTICE GUIDE 57
“Contracts can either
be for a fixed duration,
say 50 years, or for the
remaining lifetime of the
lives covered.”
Currently, it is typical that only pensioners in the course of payment (together with
contingent benefits) are covered, and other dependants such as children are excluded.
Also deferred members are not currently covered under such contracts because
of both the extremely long period of longevity risk with these members, and the
uncertainty surrounding the various options these members have either before
or at retirement (for example transfers or early retirements). The latter makes
predicting the cash-flows very uncertain.
An illustration of the mechanics of the arrangement is shown below:
Structure Diagram
Floating
Actual annuity payments as they fall due
Insurer
Pension Scheme
Fixed
Nominal cash-flow fixed on day 1 of the contract
Contracts can either be for a fixed duration, say 50 years, or for the remaining
lifetime of the lives covered. Additionally, under some arrangements, the floating
leg can reflect general population mortality rather than the actual mortality of the
lives covered in the contract.
The contract is collateralised to provide protection to either party in the event of a
default by the other party.
Unlike a Buy-in/Buyout contract, there is no up-front premium, so the pension
scheme retains control of its assets but has the contractual obligation to meet the
fixed-leg instalments when they fall due.
Pension schemes find such arrangements attractive as it mitigates the risk of
members living longer than expected whilst retaining control and flexibility
over the scheme assets. The trustees are exchanging unknown future pension
instalments for a more certain and predictable cash-flow. This enables the trustees
to plan and negotiate with employers with more certainty.

58 ABI GOOD PRACTICE GUIDE
To date all completed cases involve significant sums, and it is realistic to expect
that this will continue for the foreseeable future. A realistic minimum for such
a transaction would typically be £300 million. This is primarily driven by the
requirement to complete a scheme mortality investigation and have statistical
confidence in the conclusions drawn from such an investigation, and the significant
impact of fixed expenses in such an arrangement.
Issues for scheme trustees to consider in longevity insurance would be:
••
The scheme’s counterparty exposure to the third party. This is mitigated to a
significant extent by the collateral arrangements.
••
Whether to go for a swap related to the actual scheme mortality, or a
population index.
••
Whether the swap covers the expected future lifetime of the lives, or for a
limited duration.
••
Whether to contract with an insurer or an investment bank. Note that a contract
with an insurer is covered by the Financial Services Compensation Scheme.
••
If longevity insurance is initially taken out, whether on subsequent Buyout or
Buy-in this can be transferred to the eventual insurer. It is not typical for such a
contract to have a novation to a third party clause inserted as both parties would
need to be comfortable with the new party and the counterparty risk to that new
party. Clearly if the subsequent Buy-in or Buyout was arranged with the same
counterparty as the longevity insurance this would seem to provide the best
chance for such a novation to succeed.
• • The operational aspects of agreeing and reconciling the regular instalments need
to be considered as well as the requirement to calculate and meet any collateral
payments/receipts.

ABI GOOD PRACTICE GUIDE 59
13. Liability Management
••
Managing a scheme’s liabilities ahead of a Buy-in or Buyout can reduce
the overall settlement costs through reducing or simplifying the liabilities
to be insured.
••
There are different ways in which liabilities can be managed for active,
deferred and pensioner members of a scheme.
••
The Pensions Regulator has recently issued guidance on inducement
exercises and schemes considering liability management solutions should
refer to this guidance.
There are steps that can be taken to manage the scheme liabilities ahead of
an eventual Buy-in or Buyout, which help reduce the overall settlement cost.
Liability management in a defined benefit pension scheme is any action which
helps control or reduce future benefit payments, and hence scheme liabilities.
In the same way that a scheme has active, deferred and pensioner members,
there are liability management solutions relating to each category of member.
The Pensions Regulator has recently issued guidance on inducement exercises
and schemes considering liability management solutions should refer to this
guidance. The guidance starts from the premise that trustees should start from
the presumption that such exercises and transfers are not in most members’
interests, and they should therefore approach any exercise cautiously and actively.
The regulator’s principles for doing so are summarised below for ease of reference:
Principle 1 – Clear, fair and not misleading. An offer should be made a way that
is clear, fair and not misleading, tailored to the needs of its audience, to enable
members to understand the risks and make decisions that are right for them.
Principle 2 – Open and transparent. The offer should be open and transparent
so that all parties involved in the process are made aware of the reasons for the
exercise and the interests of the other parties. There should be no undue pressure
on individuals to accept an offer and reasonable time should be given to make an
informed decision.
Principle 3 – Manage conflicts of interest. Conflicts of interest should be
identified and appropriately managed in a transparent manner, and where
necessary removed.

60 ABI GOOD PRACTICE GUIDE
“Many defined benefit
schemes offer a pension
based on a final salary
at retirement or date
of leaving, and liability
valuations for active
members typically
anticipate a level of
future salary growth on
these accrued liabilities.”
Principle 4 – Trustee consultation. Trustees should be consulted and engaged
from the start of the process, with any concerns addressed before progressing.
Trustees should ensure the offer is consistent with tPR guidelines.
Principle 5 – Independent financial advice. Fully independent and impartial
financial advice should be made accessible to all members and promoted in the
strongest possible terms; in almost all circumstances, the structure of the offer
should require that members take financial advice. The employer should pay for
advice and require members to take advice before making a decision.
http://www.thepensionsregulator.gov.uk/guidance/incentive-exercises.aspx
Some of the main types of liability management are set out below.
13.1. Liability management for active members
Closing the scheme to future accrual is the typical liability management for active
members. Whilst it is not legally possible to reduce accrued pension benefits, it
is possible to turn off future accrual of pension benefits by closing the scheme
to future accrual. Active members will need to be offered some other form of
pension benefit outside of the scheme, with eligibility to a defined contribution
scheme often being the replacement scheme of choice nowadays. Closing to future
accrual caps the build up of further defined benefit liabilities, and also ensures the
scheme is then in a position to either Buyout or Buy-in those liabilities. Even if a
scheme has not closed to future accrual, insurers can quote annuity prices for these
liabilities, with a truing up adjustment required at the end of the process to reflect
any items such as salary increases which were not included in the quotation data
or a longer period of accrual than initially envisaged.
The other main form of liability management for active members is capping the
growth of future pensionable pay rises. Many defined benefit schemes offer a pension
based on a final salary at retirement or date of leaving, and liability valuations for
active members typically anticipate a level of future salary growth on these accrued
liabilities. If pensionable salary growth is capped, then this reduces accrued liabilities
to the extent that the cap is lower than the level of future salary increases anticipated
in the liabilities. If the cap is lower than price inflation, which is possible, then this can
lead to larger savings on the accrued liabilities than closing to future accrual.

ABI GOOD PRACTICE GUIDE 61
13.2. Liability management for deferred members
This typically involves running an Enhanced Transfer Value (ETV) exercise. Deferred
members of a scheme have a statutory right to take a transfer value of their benefits
out of the scheme to another pension arrangement (typically a defined contribution
scheme). If members do this, the scheme’s liability in respect of that member is
fully settled, which is attractive for the employer. However, members rarely do
this of their own accord, often because scheme transfer values are not particularly
generous or because they simply do not think of it. Employers can seek to facilitate
the transfer out deferred members by offering an enhancement to scheme transfer
values, paid for by the employer, such that the overall transfer value is a compelling
offer for the member.
Companies running ETV exercises should offer members access to independent
financial advice so that members can make an informed decision about whether
or not to accept the offer. It is vital that trustees and employers ensure that
communications with members are clear, transparent and not misleading.
Independent financial advisers will sometimes anticipate returns from riskier asset
classes such as equities when assessing an ETV offer, which means that ETVs
can be a cheaper way to settle deferred liabilities than a Buy-in or Buyout, as
insurance companies do not anticipate the same level of investment return. From
an employer’s perspective, it may therefore make sense to run an ETV exercise
before completing a Buy-in or Buyout of the liabilities. Some insurers can complete
a Buyout whilst an ETV exercise is being run by anticipating a level of take-up and
then having a truing up adjustment to reflect the actual outcome of the exercise.
13.3. Liability management for pensioner members
Pension increase exchange (PIE) exercises can be run for pensioner members, which
is when pensioner members are offered the choice of exchanging some or all of
their future non-statutory pension increases for an immediate uplift in pension. If
some of the value of the increases is retained by the scheme then this reduces the
scheme liabilities to the extent that members choose to take the offer. This is very
similar to the already common practice of letting members exchange (or commute)
some of their pension for a lump sum at retirement. As well as reducing the scheme
liabilities, PIE exercises can leave more straightforward pension payments which can
then be annuitised more efficiently with an insurer.

62 ABI GOOD PRACTICE GUIDE
14. Treating Customers Fairly
••
Regulated insurers are also required to treat customers fairly and the FSA
puts considerable effort into monitoring the TCF efforts of insurers.
••
The focus lies on so-called “retail customers”, however, in a Buyout the
insurer is likely to treat members and trustees as if they are retail customers.
••
Insurers will therefore carefully consider the structure and contract terms for a
Buy-in or Buyout to ensure that all customers are treated fairly at all times.
Regulated insurers are also required to treat customers fairly and the FSA puts
considerable effort into monitoring the TCF efforts of insurers.
TCF is customer focused and its expected outcomes are defined in terms of the
outcomes customers can expect:
••
Consumers are able to be confident that they are dealing with firms where the
fair treatment of customers is central to the corporate culture.
••
Products and services marketed and sold in the retail market are designed to meet
the needs of identified consumer groups and are targeted accordingly.
••
Consumers are provided with clear information and kept appropriately informed
before, during and after the point of sale.
••
Where consumers receive advice, the advice is suitable and takes account of
their circumstances.
••
Consumers are provided with products that perform as firms have led them to
expect, and the associated service is of an acceptable standard and as they have
been led to expect.
••
Consumers do not face unreasonable post-sale barriers imposed by firms to
change product, switch provider, submit a claim or make a complaint.
The focus lies on “retail customers”, for example policy holders who have the
choice of whether or not to purchase. However, in a Buyout, the insurer is likely to
treat members and trustees as if they are retail customers. Insurers will therefore
carefully consider the structure and contract terms for a Buy-in or Buyout to
ensure that all customers are treated fairly at all times.
Further details are on the FSA website at http://www.fsa.gov.uk/pages/doing/
regulated/tcf/

ABI GOOD PRACTICE GUIDE 63
Glossary of terms
Actuarial assumptions
The assumptions which the actuary makes when carrying out an
actuarial valuation. Key actuarial assumptions include the rate of future
investment returns, the rate of future inflation and how long each
member will live.
Actuarial valuation
A calculation by an actuary which estimates how much money is needed
today to provide the benefits members have built up in the scheme.
Administration
The day to day running of the scheme, including the calculation and
payment of benefits.
Assets
The bonds, equities and other investments which the scheme or the
Provider holds to meet the benefits promised to members.
Benefit consultant
The pension professional or firm which advises the trustees on the
Buyout or Buy-in process.
Benefit specification
The detailed list of benefits which are to be provided under the policy.
The benefit specification is usually contained in a schedule at the back of
the quotation.
Bonds
An investment which takes the form of a loan from the bond holder
(for example the scheme) to the bond issuer (for example a company or
government). The key types of bonds are gilts and corporate bonds.
Bulk annuity
A Buyout or Buy-in policy under which the benefits of a number of
members are secured with the provider. This compares to an individual
annuity which only covers one member.
Buy-in
Trustees remain responsible for members covered by the insurance policy.
The sponsor remains liable for funding the scheme. The policy is held by
the trustees as an asset of the scheme covering the pension liabilities
defined. Investment and longevity risk are transferred away from the
scheme to the insurer.

64 ABI GOOD PRACTICE GUIDE
Buyout
Transfers all obligations to members to the insurer. Members are issued
with individual annuities to secure equivalent pensions and cease to be
in the scheme. The scheme is eventually wound up. The sponsor no
longer funds or accounts for the scheme and trustees are discharged
from responsibility.
Collateral
Assets earmarked to reimburse one party in the case of default of a
counterparty (for example a bank or insurance company). Sometimes
used in larger Buy-in contracts or longevity swaps to provide additional
security to the trustee.
Contracted-in
A scheme is contracted-in if the members continued to build up
the additional state pension (the State Second Pension) whilst in
service under the scheme. A contracted-in scheme is one which is not
contracted-out.
Contracted-out
A contracted-out scheme provides members with benefits which replace
their additional state pension (the State Second Pension). Where members
are contracted-out, they and their employer pay lower National Insurance
Contributions in return for the scheme agreeing to provide certain benefits
in place of the State Second Pension.
Corporate Bonds
Bonds issued by companies. The term is often also used to refer to Bonds
issued by governments and national institutions which are not issued in
the home currency of the issuer.
Data
The detailed information about scheme members and their benefits.
Data cleanse
The process of checking that scheme data is complete and accurate so that
any errors or omissions can be corrected.
Data verification
A process where the provider checks all the Data relating to a policy.
The data is usually listed in schedules at the back of the policy. The purpose
of data verification is to identify any errors or omissions so that the
correct benefits are provided under the policy.

ABI GOOD PRACTICE GUIDE 65
Deferred members
Members who have left pensionable service under the scheme but have
not started to receive their pension. Their pension has been deferred until
they retire.
Defined benefit scheme
A pension scheme under which the benefits which members are entitled
to receive are defined by the scheme’s governing documents. The benefits
are typically defined by reference to the member’s earnings and length of
service. The scheme members usually pay a set amount of contributions (if
any) and the employer is required to pay whatever else is required to provide
the defined benefits.
Dependant/Dependants’
pensions
A dependant is someone who relies on a member, either financially or
due to disability. When a member dies, a dependant’s pension may be
payable to their dependants. Each scheme will have its own terms for
paying dependants’ pensions.
Derivative
A financial instrument which provides for payments to be made
based on the performance of a particular asset or index. A swap is a type
of derivative.
DIY Buy-in
Trustees purchase inflation, interest rate and longevity swaps via multiple
transactions with an investment bank to mimic a buy-in without having
to transfer assets out of the scheme. Also known as a synthetic buy-in.
Early retirement
Where a member takes their pension before their normal retirement age.
Employer
The employer who is responsible for funding the scheme. In schemes which
have more than one participating employer, employer usually refers to the
principal employer. Sometimes referred to as “scheme sponsor”.
Enhanced transfer
value (ETV)
An approach to pension scheme liability management in which the
employer pays for an offer over and above the level of the scheme’s
standard transfer value terms in order to “incentivise” members (usually
deferred members, but can also be offered to actives) to transfer
benefits out of the scheme into another arrangement, typically a defined
contribution plan. The Pensions Regulator has issued guidance on how
such arrangements should be conducted, stressing the importance of
individual financial advice and clear communications to ensure member’s
can make an informed choice.

66 ABI GOOD PRACTICE GUIDE
Final premium
If the provider is carrying out a data verification exercise, the policy may
require a final premium to be calculated once that exercise is complete.
The premium paid by the trustees at the start of the policy is adjusted to
reflect data changes identified during data verification and a balancing
premium payment may be due from or to the trustees.
Final quotation
The quotation issued by the provider at the end of the negotiations. If
accepted by the trustees, the final quotation will set out the specific terms
for the Buyout or Buy-in transaction and it will form part of the policy.
Financial Reporting
Standard (FRS) 17
The accounting standard used by many UK companies to show in their
company accounts the company annual pension costs and the value of the
assets and liabilities of any defined benefit schemes.
Financial Services
Authority
The independent body which regulates the financial services industry,
including insurance companies. Many of the functions of the FSA are due
to transfer to the Bank of England in 2012.
Financial Services
Compensation
Scheme (FSCS)
A statutory arrangement to provide compensation when a financial
services company like an insurer defaults. It is funded by a levy on the
financial services industry. It is expected to provide a compensation level
of 90% of all insured benefits.
Funding
Funding involves setting aside assets to meet a future liability. The term is
usually used to describe the contributions which may be paid to a scheme by
its employer.
Funding level
The level of funding for a scheme shown by comparing the scheme assets
against the value of its liabilities. The funding level is usually expressed as
a percentage, with 100% meaning that the assets equal the value of the
liabilities. The value of the liabilities depends on the actuarial assumptions
used in the calculation and different assumptions can be used for different
actuarial valuations.
Gilts
Bonds issued by the UK Treasury.

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Guaranteed Minimum
Pension (GMP)
The minimum pension which a scheme must provide to a member in
relation to service which was contracted-out on a final salary basis in
the period between 6 April 1978 and 5 April 1997. GMP benefits must
comply with additional requirements under legislation.
IAS19
IAS19 or International Accounting Standard Nineteen is an accounting
rule concerning defined benefits pension schemes under the rules set by
the International Accounting Standards Board (see IFRS 17).
Initial quotation
A quotation issued by a provider during the negotiations of a Buyout or
Buy-in. It is usually based on certain assumptions and will often not take
into account the full scheme data, but it gives an estimate of the likely
premium and allows the trustees to compare different providers.
Insured benefits
The benefits which are insured under the Buyout or Buy-in policy and
will be paid by the provider.
Insurer
The life insurance company which enters into the Buyout or Buy-in with the
scheme and undertakes to pay the insured benefits as set out in the policy.
Late retirement
Where a member delays taking their pension until after normal
retirement age.
Limited Price
Indexation (LPI)
An increase applied to a pension in payment which is calculated in line
with the increase in a prices index, but subject to an annual limit (usually
either 5% or 2.5%). As well as the cap, there is a floor of 0%.
Longevity insurance
Trustees pay the estimated pension costs to the insurer, based on
agreed actuarial assumptions. The insurer pays the real pensions due to
the trustee. Trustees remain responsible for the scheme and members.
The risk of increased pension costs from members living longer than
estimates is removed from the scheme.
Market conditions
The state of play in financial markets at any point in time.
Market conditions date
A reference date set by the trustee on which insurers are asked to base
the economic conditions in their quotations.

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Member
An individual who has pension rights under a scheme.
Normal retirement age
The age at which a member’s pension would normally come into
payment under the scheme rules.
Occupational pension
scheme
A pension scheme established by an employer to provide pension benefits
for its employees in relation to their employment with that employer.
The scheme may also cover employees of other group companies.
Pension Protection Fund
(PPF)
A fund set up by legislation to take over pension schemes where the
employer has gone into insolvency and the scheme is under-funded.
Pensioner
A member who is receiving a pension from the scheme.
Pensions increase
exchange (PIE)
A liability management approach whereby members are offered the
option to give up non-statutory pension increases in exchange for a
higher starting pension. Typically, this would result in a saving to the
scheme, a proportion of which may be shared with the member choosing
the exchange option.
Pensions regulator
The body set up by legislation to regulate the operation of pension
schemes, particularly occupational pension schemes.
Policy
The insurance policy issued by the provider under which the provider
commits to pay the insured benefits in return for the premium.
Policy terms
The legal terms and conditions which govern the operation of the policy
and set out the rights and obligations of the provider.
Premium
The money paid by the trustees to the provider in return for the provider
agreeing to pay the insured benefits under the policy.
Progressive buyout
A buyout where trustees transfer responsibility for members to the insurer
progressively over a set timescale as data and scheme assets – the premium
– become available.

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Provider
See Insurer.
Quotation
A document issued by the provider which states the amount of the premium
and how the amount is adjusted between the date of the quotation and the
date it is paid. The quotation will usually also include the benefit specification
and the member data.
Revaluation
The increases which may be applied to a deferred member’s pension in
the period between leaving pensionable service and retirement.
Risk premium
A charge which is made, or a profit which is required, in return for taking
on a risk.
Risk transfer date
The date on which insurance commences.
Scheme
The occupational pension scheme which is entering into the Buyout or
Buy-in policy.
Scheme rules
The rules governing the operation of a scheme. They are usually in the
form of a trust deed and rules.
Surrender
Cancellation of the policy. The policy terms will usually state a limited
set of circumstances in which either the trustees or the provider may
surrender the policy.
Swaps/Synthetic Buy-in
A type of derivative where the parties agree to swap a particular asset
(or the returns on a particular asset) in return for another asset (or the
returns on another asset) over an agreed period of time. A swap contract
can also be used to swap two different, but defined, cash flows (such as
future pension payments). See DIY Buy-in.
Trust deed
See scheme rules (often referred to as trust deed and scheme rules).
Trustee/Trustees
The group of individuals or company which is the trustee of the
scheme and holds the assets of the scheme on trust for the members
and other beneficiaries.
Wind-up
The process by which a scheme is closed down and all its assets and
liabilities are transferred elsewhere.

70 ABI GOOD PRACTICE GUIDE

For more information, contact:
Association of British Insurers,
51 Gresham Street,
London EC2V 7HQ
020 7600 3333
www.abi.org.uk