Buying-out scheme benefits with an insurance company is still the ultimate goal for many closed schemes, but the journey to get there is not always quick or smooth sailing. There are many key things that trustees should be conscious of before they start the journey, such as scheme powers, data, administration resources, trustee protection and member experience.

Many defined benefit schemes have now closed, and with a maturing population and improved funding buy-out is becoming a realistic goal for many schemes.  Indeed many are already speeding along the buy-in highway and the insurance market is seeing rush hour traffic.

Whether schemes are only thinking about their journey or it is well underway, there are many steps schemes can take to help them be better prepared and more likely to succeed.  Our experience suggests that for even the best run schemes the journey is unlikely to be smooth the entire way through and unexpected issues may crop up.

Here are five key things trustees should be thinking about on the journey:

1. Powers under the rules. Trustees should consider seeking advice on key powers in the scheme’s governing documentation. Do the trustees have the power to invest in a buy-in policy? Are there rules that make the scheme hard to run when invested in this way? How are surplus monies used? Who has the power to wind-up the scheme? Can the scheme be amended, if needed, once winding-up has been triggered? Knowing the answers can help frame the journey from buy-in to buy-out.
2. What benefits are to be secured.  Trustees need to be clear on what benefits are going to be secured with the insurer. A robust benefit specification should reflect the benefits as set out in the scheme rules. Sometimes it may be reasonable for higher or different benefits to be provided, such as when it’s easier to insure, but in these circumstances trustees should be advised as to whether those changes are feasible and appropriate under the rules. Sponsor agreement is usually needed. The benefit specification should also be reviewed early by the administration team to flush out any mismatches between what is done in practice and the rules. This can allow time for issues to be fixed and/or allow trustees and sponsors time to understand what (if any) financial implications there are.
3. Data. Although there is a period between buy-in and buy-out for a data cleanse, this period may be limited – typically one to two years. With administration teams stretched on both trustee and insurer work, leaving too much data cleansing to after the buy-in can create enormous practical issues when trying to meet the contractual deadlines. Contractual extensions to a data cleanse period are not always “a given”, and failure to meet those timelines can have financially material consequences. It is therefore usually beneficial to look carefully at the state of the scheme data prior to buy-in. Fixing major issues before buy-in can be a wise move, as the more accurate the data, the more accurate the price and the lower level of resource pressure after the buy-in.   
4. Trustee protection. What do the rules say about trustee exoneration, or any current trustee indemnities? This will be an important element for many trustees, especially individual trustees. Even if the possibility of a claim being brought is low, the costs of defending a claim (if not covered by insurance or sponsor indemnity) means the residual risk of claims can be of real concern. Trustees should consider if insurance can be purchased by the sponsor, or if the scheme rules allow for schemes assets (if available) to be used. The terms of these clauses also impact the level of tolerances that can be used in data cleansing where the historic data is messy. Everyone wants to be pragmatic, but for well-funded schemes an acceptable level of pragmatism depends heavily on the level of trustee protection in the rules.
5. Member communications. There are various communications that need to be sent to members at different points in the process. Often the insurer will want to review –or may even want to manage – sending the communications, depending on the circumstances. The sponsor may also have an interest in how the change is communicated. Buy-out is a major achievement, and for many trustees member experience will be an important factor when deciding the insurer. Member communications will play a key part in this. Those early member communications will be the crucial initial bridge of moving member experience and contact over to the insurer.

For many schemes there will be other areas that they will want to seek advice from their advisers or delve into more deeply. This will depend on each scheme’s own individual circumstances.