A phased pensioner buy-in strategy can help schemes reach full buyout with greater certainty and at a lower price if it is “done properly”, according to LCP.

In a blog, LCP partner, David Salter, stated that although there are benefits to buy-ins, there are “pitfalls to avoid” that can make it harder for a scheme to move to buyout if not properly navigated.

Pensioner buy-ins offer a way to hedge longevity in incremental steps, which can reduce risk in a more efficient manner as it avoids any single risk becoming dominant, Salter noted.

Furthermore, he explained that a series of buy-ins can help protect a scheme against a worsening in future pricing and be more cost effective than a single, large transaction.

As insurers only have a limited pipeline of attractive assets to support their best pricing, schemes being flexible can seize those pricing opportunities as they arrive, while a large transaction can be reliant on the assets insurers have available at the time.

“Pensioner buy-ins also have softer benefits,” said Salter. “A full buyout is a complex transaction, so undertaking a more straightforward initial pensioner buy-in is a valuable learning experience.

“It is also a clear demonstration to the market that the scheme is well prepared and willing to transact.”

Despite the positives, Salter warned that there were “pitfalls” to overcome when completing buy-ins on the road to buyout.

He noted that approaching the market for subsequent transactions needs to be done “carefully”, as other insurers may view the incumbent insurer as having an advantage and may be less likely to quote or allocate their best assets to the pricing as a result.

“Secondly, it is vitally important for any pensioner buy-in to be sized appropriately”, he added.

“This is to ensure the remaining invested assets can generate sufficient return to close the gap to buyout over the desired time-frame, whilst providing sufficient collateral for the wider hedging strategy.”

Schemes were also urged to consider how the schemes membership profile and asset strategy will evolve before entering into an initial buy-in, as that is “key” to sizing the initial buy-in and when to extend it in the future.

Finally, Salter suggested that schemes consider residual risks cover as part of the initial buy-in.

Residual risks cover is purchased in the majority of full buy-ins/buyouts over £250m and typically comes into effect at the point of final buyout.

“This cover involves intensive due diligence on the data and benefits to agree the price and terms and if this is not completed as part of the initial buy-in when there is competitive tension then it may result in less favourable terms, or even no cover at all, from the incumbent insurer at the point of buyout,” Salter stated.

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