Case Study: Move to Corporate Sole Trustee for Buy-in

Background

LawDeb Pension Trustees had acted as independent trustee for this scheme with assets of £80million for a number of years. It had been closed to new members for ten years and to future accrual for a couple of years. Its membership of around 600 in total was split approximately 50:50 between deferred and pensioner members with the capital value of the scheme’s liabilities broadly in line. The outcome of the latest valuation carried out meant that the scheme was looking to be fully funded on a self-sufficiency basis in just over seven years.

The trustee board was made up of LawDeb Pension Trustees acting as independent trustee and chair, two employer nominated trustees and two member nominated trustees (MNTs). Since the decision to close the scheme to future accrual, the sponsor had been seeking to simplify the scheme’s governance.

Why corporate sole trustee

The attraction of simplified governance for the scheme arose for three key reasons:

• The scheme was viewed as a legacy obligation and no longer as a means of incentivising staff
• The demands placed on the lay trustees in an increasingly complex environment were recognised
• The advantages to the sponsor of streamlined governance, in terms of the provision of considered and well-documented advice at reasonable cost on a timely basis, was also important

Once the options for achieving simplified governance had been explored the preference for a move to a corporate sole trustee was expressed.  A factor in this was the recognition that a knowledgeable corporate sole trustee would be particularly appropriate in helping secure the scheme’s liabilities through a bulk annuity contract.

Issues of transition to a corporate sole trustee for existing trustees

Whilst initially reluctant to resign, the existing trustees were ultimately supportive of the change in governance structure.

At the outset, the trustees, especially the MNTs, wanted to retain their involvement in the running of the scheme.  However, during discussions they were reassured that the proposed structure would enhance effectiveness. The establishment of a Consultative Committee with a broad monitoring role was key to allaying their concerns. The Committee was made up of members of LawDeb Pension Trustees, the company’s Pensions Manager, one of the retired MNTs and another person not previously involved with the scheme.

All retiring trustees were adequately indemnified.

Streamlined governance

The scheme’s advisers have been rationalised and the division of responsibilities between the company, advisers and LawDeb Pension Trustees agreed.  This realignment has led to more efficient and cost-effective governance which provided a structure able to negotiate the steps necessary for a buy-in of the scheme’s liabilities.

Move to buy-in

Within six months of the switch to corporate sole trusteeship indicative buy-in quotations were obtained from three insurers. These showed a shortfall in assets versus the bulk annuity premium which was more than the contributions committed by the company under the Schedule of Contributions. It was agreed that general market pricing would be monitored and that an active dialogue would be maintained between the trustee and one of the insurers, which would provide regular pricing updates.

That insurer went on to offer to reduce its bid, but would only do so if the trustee entered into exclusive negotiations. This was agreed and the sponsor indicated its willingness to fund any shortfall by way of a single premium, so long as it did not exceed the existing committed contributions.

The trustee and sponsor worked together to select a deal manager for the transaction, to advise on whether the pricing was at least as good as could be achieved by way of competitive tender, and then to bring together a successful transaction quickly. The trustee’s legal advisor ensured that the trustee would be able to rely on the advice provided by the deal manager.

An exclusivity agreement with the insurer was signed and a further reduction to the premium negotiated. Once quotations had been received and analysed, the advice received was that the premium achieved was “at least as competitive as those achieved in other similar transactions”.

Following receipt of formal/final advice, the documentation was reviewed and contracts signed and all within three months from when the insurer had offered to reduce its bid and in the first couple of years of our sole trustee appointment. 

A buy-out was concluded once the data reconciliation and confirmation of the terms for benefit equalisation were finalised.

The initial quotations for a buy-in was made six months after the transition to a sole trustee. The premium sought six months later. 

Pricing changes were monitored and after ten months the insurer reduced its bid. 

The deal was concluded three months later.