Running an exclusive process when approaching the insurance market for a buy-in or buy-out could lead to a better outcome for pension schemes than a traditional auction process, according to Hymans Robertson’s Ian Church.
The Head of Core Transactions and Risk Transfer Specialist said: “Pension schemes traditionally focus on running an auction process with several insurers. However, another option is to run an exclusive process: going through a careful selection process to choose one insurer to work with up front, and then request pricing only from that insurer.”
He explained: “For some schemes, going exclusive could lead to a better outcome than a traditional auction process, but the right approach will depend on the scheme’s circumstances and needs.
“A traditional market approach doesn’t always deliver a solution that fully accounts for the requirements a scheme might have, and a more tailored transaction structure through an exclusive relationship could help the scheme.”
According to Church, there are some cases when characteristics of certain schemes, like their size, may mean insurers are not willing to engage in developing a solution that meet these requirements if part of a competitive process, but if offered exclusivity, an insurer may take a different view.
“Exclusivity can also be powerful for catapulting small schemes up an insurer’s priority list, and some insurers are making exclusivity a condition of quoting for a small scheme. However, this isn’t just for small schemes, from analysing reported transactions and talking to insurers, we estimate up to 30% of the buy-in and buy-out premiums in 2022 were transacted this way,” he continued.
Adding: “In our experience, exclusivity still leads to competitive pricing, as experienced advisers and professional trustees know what excellent pricing looks like. Insurers also know if they do not give an excellent price the transaction is unlikely to proceed, and the advisers and trustee will be less likely to select them for an exclusive process in the future.”
There are a number of non-price factors that will influence whether a scheme chooses exclusivity, these could include the insurer’s solvency and financial strength or its Environmental, social, and corporate governance (ESG) credentials.
Church said: “There are several non-price factors that could influence the choice of insurer once the decision for exclusivity has been made. Among the most important non-price factors are the insurer’s solvency and financial strength, as well its potential to deliver good member experience.
“Other non-pricing factors may include ESG credentials, capacity to deliver the transaction, and flexibility to meet the scheme’s requirements. In an exclusive process, an insurer is more motivated to work on meeting scheme-specific requirements.”
On the topic, Hymans Robertson has published three case-studies showing how it leveraged exclusivity to achieve very attractive pricing and terms for several buy-ins.
These include a £200 buy-in, in which the firm agreed a bespoke contract structure to accommodate the scheme’s illiquid assets; and a transaction completed within six weeks of Hymans Robertson’s appointment as risk transfer adviser – capturing, what they describe as a “very attractive pricing” for a £120m buy-in.
The third case-study is a £100m buy-in, secured on “attractive terms, were all of the scheme’s non-price requirements where satisfied, including some bespoke transaction structuring.
