Wind-up perspectives
Improvements in funding have accelerated the endgame journey for many pension schemes. Many are, or are planning on, transacting full scheme insurance buy-ins and some are considering the merits of running-on to extract surplus if legislation changes. Either way, pension scheme wind-ups have been brought into focus, highlighting the need to get 'wind-up ready'.
The 'post buy-in' world can be a somewhat alien place to many. Risks and objectives take on a different perspective when there is a finite timeline and it's the last chance to make sure the benefits being administered are complete and correct.
Each scheme is different, but early strategic planning will highlight the material issues that need to be addressed and help to manage risk. We explore below some initial considerations for trustees and scheme sponsors on their wind-up journey.
It's crucial to understand the key parameters and objectives up front. Trustees and sponsors should identify:
Assessing 'wind-up readiness' is the first step in solving the multi-disciplinary puzzle* that schemes are faced with when winding up. Foresight and strong project management is required to deliver cost effective solutions over short timescales for many dependent workstreams.
*Strategic at its core, but with elements of legal, compliance, investment, actuarial, administration, member communications and operational governance.
| Governance | What does a structure for swift and effective decision-making look like? What does a suitable risk framework look like (see our article discussing a proportionate approach to meeting the General Code after full buy-in)? |
|---|---|
| Administration transition | What are the timescales? How will this interact with other data or benefit exercises (e.g. Guaranteed Minimum Pension (GMP) equalisation, pensions dashboard)? What are the insurer requirements? |
| Funding | How are expenses and uninsured liabilities going to be managed in the scheme's final years? What are the options for distributing any residual surplus and what information is needed to determine this? |
| Money purchase benefits | What is the plan for discharging these benefits, such as Additional Voluntary Contributions (AVCs) and any defined contribution section benefits? |
| Annuities | How are any existing annuities/buy-in policies going to be dealt with? |
| External sponsor reporting | What are the auditor's views on accounting treatment? How will changes be communicated to the market? Consider any reputational risks. |
| Programme management | A specialist Project Manager is essential for a well-run project. Who will carry out this role? WTW's specialist team can provide the right level of operational support required in each case. |
| Communications | What's the strategy and format for keeping members informed? What are the insurer's requirements? If surplus is being refunded to the sponsor, how will the member consultation be run? |
| Trustee protections | Will run-off indemnity cover or residual risk insurance be required and how will it fit with existing protections? WTW have specialists who can help trustees secure the cover they need. |
| Member options | What terms are available and how will these change? Is a one-off exercise justified, e.g. for winding-up lump sums? Will any options need to be removed before buyout, e.g. bridging pensions? |
The scheme-specific nature of a wind-up means that a wide variety of complexities may need to be addressed, which take time to resolve. Triggering wind-up is an irreversible decision, so needs careful planning to ensure that all issues are dealt with. The phrase 'a stitch in time saves nine' springs to mind and considering how these points will be addressed early will avoid unnecessary costs and project overruns. These might be:
WTW has supported the full range of pension scheme wind-ups, from cases with a handful of members to those with multi-billion pound funds. From this experience, WTW and our Winding Up Specialist Group can provide trustees and scheme sponsors with support throughout the whole wind-up journey, starting with an assessment of wind-up readiness. Please contact us for an exploratory conversation.
