Article 3 December, 2021

Case Study: Getting “buy-in” ready

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Executive summary

Preparing for a transaction with an insurer (whether buy-in or buyout) is an area where River and Mercantile can add real value through their in-depth market knowledge. Recently, we used that knowledge to identify that one of our Fiduciary management clients had three schemes that were a lot better funded than the estimates provided by their actuary. We proactively engaged with the client to suggest that further investigation was warranted. As a result, we simultaneously completed a unique triple transaction for this client. The buy-in transaction for two schemes and a full buy out for another scheme took just 11 days to complete after the trustees received competitive quotes and required no additional contribution from the sponsor. A full detailed strategy process to make the schemes buy-in/buyout ready was key. We outline the details below.

When buying-in or buying-out, a scheme insures part or all its liabilities with an insurer. This sort of transaction can benefit the scheme members and the sponsor by achieving a significant risk reduction. Namely, it’s expected to improve the probability members receive their pension in full. A buy-in transaction is a useful risk management tool that can be a stepping stone on the way to a full buyout.

Preparation stage

The starting point for these transactions is always to establish how close the schemes are to a buyout. In this particular case, we knew from our own experience and knowledge of other transactions that were taking place that other clients were getting more favourable terms than were being estimated by the schemes’ actuary.  It made sense therefore to propose to the trustees that they prepare their member data to approach insurers to provide pricing.

At the same time, because we expected from our market knowledge that the expected buy-in/buyout would be nearer than previously thought, we advised the trustees to change the liquidity terms of our mandate so we could only hold assets that we could sell within two weeks. By moving to a more liquid portfolio in advance, we explained that we would be able to avoid potentially penal terms to exit some of the more illiquid assets.

By doing this in tandem, we ensured that once the member data was ready, if we got a favourable price, we could transfer to an insurer at short notice if necessary.

Transactions and new investment strategy

It took about 12 months to ensure the member data was in a position to be shared with insurers. This provided us with time to find opportunities to sell any illiquid assets, and ensure that the portfolio was fully liquid so that assets could be transferred quickly, if necessary.   We also used the time to discuss future investment strategies the trustees could adopt for the two schemes considering buy-in transactions.  All of this was possible because of the experience and on the ground transactional knowledge that we have.

As the transaction neared, we:

  1. Pre-emptively designed a new liability hedge for two of the schemes to transition to at the same time as entering the buy-in contracts. This is a crucial step to avoid introducing unwanted liability risks and with an in-house derivatives team, we were able to do this, and implement it seamlessly.
  2. Advised the trustees on the post-buy-in strategic allocation for two of the schemes. We considered their target time horizon to complete a full buyout, the total level of investment risk the trustees and sponsor could bear and proposed a strategy to fit their needs.
  3. Once the strategies were agreed upon, we planned the trades required to transition to the post-buy-in strategic allocations.

Operational aspects

Besides the investment-related aspects of a buy-in/buyout, there are operational aspects that, with our help, can ensure a smooth transition to the insurer. These include transferring cash directly to the insurer, an in-specie transfer of securities to the insurer, or working with the insurer to implement a price-lock portfolio.

For these schemes, once the trustees selected the insurer, we supported them through the operational aspects. We:

  • Discussed appropriate transition timelines based on asset dealing and settlement terms,
  • Ensured we updated the liability hedge portfolios at exactly the right time, and
  • Transitioned cash to the insurer at the right time.

We transferred the cash directly to the insurer, rather than transferring funds via the trustee bank account. This helped reduce the risks associated with multiple payments taking place, as well as reducing the time to move cash to the insurer.

This represented the successful culmination of a long-term strategic project, achieving significant risk reduction to the benefit of the schemes’ members and the sponsor.  We were pleased that our experience and market knowledge, along with our set up of in-house derivatives team and our overall Solutions business‘ set up enabled us to add a lot of value for our client.  The trustees greatly valued our support in preparing them for and helping them complete the deal quickly.

Fiduciary Management

We take on the complexity of your day-to-day investment decisions on your behalf, partnering with you to help you deliver on your long-term objectives.

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