Pensions risk transfer

Joanne Tibbott: Good afternoon everyone. Thank you very much for joining us today in our latest scheme sessions volume. My name is Joanne Tibbott, I am a partner in the pensions team at Gowling WLG and I will be chairing the session today. Before we get into the session there is just a few housekeeping bits and pieces I would like to mention please. So, today's session is being recorded so if you want to watch it again or if any of your colleagues have not been able to make it, it will be available and uploaded to our website. If you have any questions which our speakers would be very happy to answer, please use the Q&A function and we will address questions at the end of the presentation. We will aim to answer as many as we can in the time that we have got and if we are not able to answer all of them obviously we will come back to you separately on those. We have got an hour in the diary, quite a lot to cover, we are proposing to probably finish just before 1pm but we will see how we go on the Q&A's just to get through as many of those.

So, today we are exploring current developments in the pensions risk transfer market, how trustees and insurers can work together and looking at managing some issues that both Sara and Rhian have seen come up on transactions recently.

Our speakers today are Sara Chambers. Sara is a legal director in our pensions team here at Gowling. She advises trustees and insurers on a very wide range of transactions; from the very small to multi billion pound transactions. And we are also really pleased to be joined by Rhian Littlewood. Rhian is a senior business development manager at Standard Life where she has been for three years and prior to that she was a consulting actuary at Aon.

So without further ado I am going to hand over to Sara who is going to deal with some legal aspects on pensions risk transfer. Thanks Sara.

Sara Chambers: Thanks Jo, yes so I am going to start off talking through the legal aspects, if I can make the slides move, and indeed I can. So the agenda is we are going to talk a bit about transferring risk, what are the options, so a bit of a starter to the topic as a whole. Then we are going to talk about where is the market now, what we are seeing, how we have got to where we are, talking about current developments and innovations, there is lots going on at the moment. The whole risk transfer market has changed quite a lot in recent years so we will be talking about what we are seeing, both on the smaller trades and the bigger trades. And then I am going to cover some kind of other tricky issues for trustees that do not necessarily relate directly to the BPA although they may do but are kind of things around the edges which trustees need to think about if they are looking at going down the risk transfer route.

So, transferring risk. What are we talking about? Risk transfer is actually a really broad topic so a lot of time when I am talking about it, I am talking about it in the context of bulk purchase annuity contracts. Both as kind of long term investment so that was a lot more common, you know, pension are only buy-ins and that kind of thing or actually full scheme buy-in to buyout projects. It is actually broader than that. So, longevity swaps, asset backed funding, super funds, I had not put on the list but should be there and ultimately the kind of not the greatest route to risk transfer but you know transferring to the PPF or if things are a bit better on the funding side, when there is insolvencies, kind of PPF transactions which tend to be with bulk purchase annuity insurers.

So, whilst that is the kind of breadth of what is pensions risk transfer, today myself and Rhian are going to be talking about bulk purchase annuities, the options that are available and the challenges that we are seeing particularly as more schemes are coming to market and with improved funding and what not.

So there is no single type of bulk purchase annuity so when we are talking about it, we might be talking about a full scheme single transaction full scheme buyout but we might also be talking about other structures and there are many more of these other structures coming into play at the moment because of the market and how things have changed in the funding levels of schemes.

So bigger schemes might be looking at umbrella structures where they set up one structure that frames the contractual terms but then there might be multiple transactions, so some trustees might want to do tranches of trades under a single umbrella depending on funding and asset availability and whatnot.

You might also have big schemes who, where schemes are trading with a panel of insurers rather than a single insurer but we might also, and they are not as common these days, but be talking about pension buy-ins which were quite common a few years ago.

We might also think about trades in the sense of what is being bought, so quite a lot of trades are on what we call a vanilla basis where it is simply a matter of trustees insuring a specified set of benefits and a specified set of data and that is what the bulk purchase annuity insurer is responsible for. But ultimately that leaves the possibility of residual risks so for the bigger schemes or schemes that have particular concerns about whether residual risks might be, we have residual risk traits and that would be residual risk covered by under a bulk purchase annuity contract covered by that insurer and so we will also talk about that and in fact how it is covering some, but not all, residual risks.

In the old days people would talk about all risks trades, they may have existed many a year ago but now actually it is a matter of looking at whether some residual risks can be covered and kind of what the insurer appetite is to exclusions and whatnot.

So that is the kind of chat and the terminology we will be using through this webinar. In terms of the meat of it, where are we not, what is going on with the market, the market is going exponentially. It was growing over the last say four or five years anyway as schemes have funded towards that but now there is unprecedented levels of activity so it was already going for it and then Liz Truss did her thing for the industry and actually the mini budget and the interest rate changes have really changed the position so quite a lot of schemes that thought they maybe four or five years away suddenly found themselves kind of looking and realising they had surplus or they were within touching distance of being able to buyout.

So that has moved us from what was a busy market to an exceptionally busy market and I think it has changed the landscape in terms of we have moved from a kind of trustees having a certain amount of power to more a movement of who the insurers want to trade with in a lot of instances because there are significant capacity restraints across the industry, both for insurers in their pricing teams and their business development teams as well as their transitions teams bringing those schemes on and getting everything sorted out for buyout, but also within the advisory market, lawyers, brokers, everyone is busy doing these trades.

It is quite different and we have got a lot going on. In terms of how it has impacted schemes, I think we have seen a huge amount of greater options and flexibilities particularly for the larger transactions but I think the knock on to the busyness is that there is potentially less flexibility for the smaller trades and what constitutes small has changed significantly and indeed what constitutes large has. So that is the kind of scene setting of what we are seeing and then I will talk and then Rhian will talk about what that means in practice.

So what is new?

I think big trades, there have been a couple in 2019, 2020 where it is kind of low billions, we have now seen a scheme trade around the six billion mark at the beginning of the year but there is talk and there is work being done on what we call mega schemes so we are not talking single figure billions we are talking double figure billions and the needs of those schemes are different, the insurers naturally want to trade and want to do these big trades but we are seeing challenges come with these; legal challenges and insurer challenges that would not have been the case with smaller schemes.

So a lot of these mega schemes might have huge numbers of different benefit sections that have come from different mergers in over the years, they tend to be quite complex from a benefit perspective and quite old, a lot of them. These schemes might suddenly have the funding but big schemes invest in different assets to small schemes so there are lots of illiquid assets that come into play, there might have been previous transactions, you might have insurance already in place with other insurers but a scheme might then want to trade with different insurers, might look at, we already have vanilla policies in place so just the basic data plus benefits type fixed policies in place but a scheme might say well if we are heading for buyout now then we do not perceive these as investments, can we go down the residual risks route.

So it is a very different beast to the small schemes and small schemes used to be, we used to talk about £50,000,000 as a small scheme perhaps but I think what constitutes a small scheme is moving a lot and now we might describe anything under say £200,000,000 as a small scheme and the increasing challenge here relates into the capacity because insurers are very busy, they are very busy on big schemes, mega schemes and so they perhaps do not have the same amount of time or capacity to spend on the smaller schemes.

But what we are seeing is the insurers know this is a challenge and know it is important that schemes are given the opportunity so we are seeing some of the bigger insurers kind of effectively putting placeholders in so that they can trade with the smaller schemes. We are also seeing brokers trying to find solutions, so a variety of solutions from platforms from which insurers can come and kind of pick schemes that may be ready to small schemes streamlined approaches so we are seeing innovation in this area but it is a challenge and we have gone from a position where a scheme would expect to get a number of insurers interested in trading with them to the smaller schemes in the market now desperately wanting to make themselves attractive for the insurers so who is in the beauty parade has perhaps switched round.

So that is what we are seeing in terms of size and that is really different even to how it was one year, two years ago so that has been quite a significant change to the mix. But as I mentioned with size comes complexity. It is not always the big schemes but it mainly is these days so illiquid assets has become an absolute buzz word in pensions risk transfer in the last couple of years because now we have got schemes who want to trade but they have illiquid assets that they might have expected to have been able to manage before the point at which they got to buyout. There are a number of solutions and the insurers have been amazingly flexible on trying to find these solutions to get these trades to happen so I am going to leave a lot of that chat to Rhian's talk about from her insurer perspective.

One thing where there is probably quite a lot of insurer but legal input is residual risk. So as I say people used to call it all risks, never really was but certainly is not now. Residual risks is trying to get cover for things that go beyond; here is my benefits spec, here is my data, you know please insure that residual risk is trying to give the trustees or indeed the members a protection and better experience should that turn out not to be the correct data or the correct legal interpretation.

Residual risk comes in many forms in some senses, so we think about from a kind of is there legal risk, is there data risk but we are also talking about are there overlooked or missing beneficiaries that need to be thought about, is the GMP equalisation methodology that has been used, you know, correct. So it is broader than just have we written down the right length of service for Mr Smith or is this the correct interpretation of revaluation on this particular scheme.

But if insurers are taking this risk and on big schemes this risk can be very significant, insurers want to make sure they know what they are taking because ultimately they might agree to take residual risk but they do not want to take known risk, so in order to determine that there is a lot of due diligence and I think due diligence now is being done in a much more kind of thorough and professional way to perhaps how it was done five or ten years ago because the importance of those risks is well known.

This is not just a problem for the insurers. The trustees and the reason residual risks is so big and important is that it is quite a big process to go through, both for the trustees and insurers. So trustees need to be able to give the insurers all of the information they need to determine what the risks are and indeed whether benefits are currently correctly described etc etc.

So this not just a matter of handing over a deed and rules and saying there insurer that is the benefits. This is a big process, it is talking about trustee minutes, booklets, letters, all of the documents that might relate to the scheme and decisions made in terms of factors for early retirement, all kinds of things, a thorough process.

Now it kind of splits between the type of schemes because certainly a year ago we would have said best practice is to make a perfect data room, give this to insurers and historically it was the insurers who arranged the due diligence with their lawyers and their internal pricing people. But actually things have changed over the last couple of years and we are seeing a mix of schemes that are really well prepared and more the, not smaller, but mid sized schemes who might be looking at residual risk preparing well, doing significant levels of vendor due diligence to help insurers and we have been involved in projects like that but there is also you know, the counter to that is the commercial reality sometimes is that some of the very big schemes just want to trade.

So we have got this mix of schemes going, trying to be perfect and trying to put all the issues on the table to the insurers and then we have got other schemes that are just dumping what data and information they have in a data room and saying dear insurer you go and have a look. So it is quite an interesting market in that sense because there is actually no perfect answer. From an insurers point of view the perfect answer is everything to be neat and tidy and go to the insurers with a perfect set of documents and things but the commercial reality with some of the bigger schemes is that we are seeing some different approaches.

So that is the kind of planning stage and that depends on funding and the corporate push to buyout and all sorts of things but not a consistent approach across the market.

Preparation is very interesting in terms of residual risks but also some of the legal structuring is really interesting. So as I mentioned some of these big schemes already have buy-in policies in place that were there as kind of long term investments or even perhaps they decided to have a series of trades with different insurers to spread the risk but when it comes to this approach to buyout, if a decision is made that residual risk should have some coverage then what we are finding is a mix of approaches so it might be that trustees are approaching insurer by insurer and trying to get those insurers to put residual risk on top of those existing policies.

But we are also seeing wrap around where the final or usually the final insurer will not only insure on a vanillas basis the segment of benefits that they have agreed to insure but also insure any risk across policies, across benefits where there are already policies in place for what are the known benefits.

Structurally that is quite difficult but a lot of the big insurers have already been liaising and there has been a few trades now such that there is, I would not say standard form, but there are documents in place that set out the basis of any collaboration between the insurers so it is becoming more normal and there is precedent for how this can be done. So that is quite interesting and it is allowing bigger schemes who have got existing policies in place to look at residual risk.

Horizon scanning. So what is going to happen next?

I am not going to spend a long time on this but just chuck out, there is a couple of things in terms of making buyout quicker. It can be quite slow to go through a cleansing process to check all the data, write out to everybody, correct any issues where the benefits have not been done correctly. So there is a move and some trustees are very keen that they want to get the scheme off their books really quickly and so we are seeing trades where it will be a single premium trade, so one slug of cash, all the due diligence and the analysis of what needs to be corrected, has been done upfront and the insurers have priced it.

And then to the extent possible and it tends to be the upwards actions rather where there might be reductions, the insurers will take over and the scheme will be bought out before necessarily all of the work has been done to correct benefits. So that is quite novel and quite interesting and we are seeing it.

The other thing where there is a lot of chat about and Rhian might comment later is collateralised trades. I think they were more common a few years ago then they have not been but with some of these mega trades there has been quite a lot of chatter in the market that there might be a move to collateralised trades where the insurers have to kind of ring-fence assets which match and which are acceptable to the trustees and match the benefits that are being secured should anything go wrong. So that is one to watch in terms of market changes.

And then I am going to just shoot through other tricky issues for trustees.

A word that we never thought we would talk about a few years ago, surplus. Surplus is now a big discussion piece. What do we do when we have bought the benefits on either a vanilla or residual risk basis and we have still got money left? So we are seeing a lot of discussion about what to do with it, what the rules actually allow because some rules do not allow a return to an employer and there would be a fetter on that but there is always chatter, return to employer. Obviously a tax issue there as well, whether discretionary increases might be available under the rules or other discretionary benefits, augmentations to member benefits.

I have put extra cover there so trustees obviously might be looking at run-off or ones who have insured on a vanilla basis might be going oh actually we can afford residual risk, can we get that out of an insurer. There are other potential residual risk options within the market.

So how to spend the surplus. That is something that trustees need to think about, speak with the employer about, it might be that there are solutions that do not go to kind of giving people more but might look at merging schemes together or if there is a DC section, using those funds to run on for DC contributions. So we are seeing a lot of all of those issues come out and it depends on the scheme rules as to what works and indeed you know what an employer is doing in terms of its general pension provision.

Other things that are coming out, DC underpins and member options. You cannot insure DC underpins, it gets a bit a tricky so we have seen different solutions out there but it is something that needs to be tidied up so if a trustee has a scheme with a DC underpin, it is not something that can be ignored until the last minute, it will need to be sorted out. There are ways to do it but it takes a lot of actuarial input, lawyers and it is a structuring piece.

The same goes for member options. You get schemes that have huge amounts of options but in reality insurers are not going to want to have unlimited options that they are insuring so that might be something that needs to be addressed and dealt with prior to going to market or at least there being a good plan to sort it out.

And then the last thing I am going to mention is there is always a flow of unwelcome case law in pensions. We have had a couple over the summer, one related to section 37, the NTL case, that is going to appeal but has created a lot of uncertainty as to what to do, what trustees should positively be doing, whether they have got a problem in terms of where the previous benefit changes have been made correctly. So that has kind of thrown a lot of questions in. Thankfully it has not stalled the market which I think was the initial concern so it is very much a watch and wait but it is something where if schemes are going to buyout, you cannot just ignore, you need to actually think about and make a decision. So that has been very relevant and will no doubt be top of the list of pensions chatter over the next year.

Another unwelcome for schemes, possibly welcome for members, case law that has come out is a BBC case in respect of a restriction on the power of amendment and in that case it suggested that amendments could not be made to stop future accrual. So not necessarily directly related to buyout but if schemes think they are closed and had that kind of amendment power, they are the schemes trustees should be looking, I would say, to see whether that amendment power relates to their scheme and whether there is any issues in terms of the closure.

So these are all of the things coming out. The starting talk was all about kind of insurance and structuring and things but these are very much in some ways proper pensions law and things that should be thought about before approaching market because actually insurers do not want trustees saying we are ready to trade and then raising a whole host of problems towards the end.

So I think that is enough from me, having chatted for far too long and I shall hand over to Rhian to give you the insurer perspective.

Joanne: Rhian I don't know if we can hear you Rhian. Audio, I don't know, yeah I think there is an issue with the audio, Rosie I don't know.

Rhian Littlewood: Can you hear me now.

Joanne: Perfect, that is fine Rhian.

Rhian: Great, thank you very much. Sorry about that, let me make a start. Thanks Sara for the introduction and very interesting presentation. As Joanne said at the start, I am a senior business development manager at Standard Life and I look after everything that is related to the pricing, structuring and execution of new business.

One of the most interesting parts of my job is the varied and complex challenges that schemes are facing when they come to market and thinking about how we, as insurers, can help them get through that. So we wanted to spend some time in this session talking through some of those points.

So here is a non-exhaustive list of some of the issues that we are seeing schemes facing at the moment. Most of these are things that Sara has mentioned so what I wanted to do is spend a little bit of time talking about our perspective on these issues, how we might think about solutions to them.

As Sara said, it feels quite odd to talk about surplus as a problem, it is certainly a very nice problem to have and I can certainly think of the majority of my career spent in consulting when schemes would have been absolutely delighted to have to think about surplus. The world has really changed and there is a lot of different things for trustees to think about these days.

Now this is not an exhaustive list and there are other issues and other complexities that certain schemes bring, so for example things like existing longevity swaps that need to be novated as part of a buyout, schemes which are part of the LGPS or other quasi public sector organisations which might have particular challenges as well.

So we will start with everyone's favourite subject illiquid assets. So going back to why this is such a feature these days. I think a lot of it can be linked back to roundabout 12 months ago when the mini budget led to a massive increase in interest rates. What that meant is that schemes who had perhaps thought they were five to ten years away from being fully funded were suddenly technically able to secure the benefits in full. However, an awful lot of schemes in that position were still holding some form of illiquid assets, whether that is pool property funds, private equity, private credit, all different shapes and sizes we have seen and actually this has become a consideration for schemes of all sizes even right down to sub hundred million schemes we are seeing come to market, still holding some illiquid assets.

So how do we deal with that? Well a lot of the time we get asked the question will you take on these assets. It is not unheard of for us to take on illiquid asset so it is certainly a question worth asking but I really think that trustees should be asking a slightly different question. I think they should be asking what value can I get for these assets from an insurer and how does that compare to the value that I might get elsewhere. Because trustees need to weigh up the value that they might get from a quick single counter party solution where everything is done in one go, only dealing with one other party versus the potential economic loss that might be, they might see by doing it.

Insurers are not necessarily the natural owner of a lot of the illiquid assets that pension schemes hold. That is because pension schemes and insurers have different regulatory regimes so assets that make total sense in a pension scheme environment are not necessarily treated very well on the insurers balance sheet and that might mean that actually the economic value that we see in them is not quite as good. There might well be better solutions found by going to the secondary market and finding a buyer elsewhere.

Deferred premiums is really part of that solution. So a deferred premium means that the whole of the premium is not due on day one or within a few days of signing the transaction, there might be a period of time, whether that is six months, a year, two years for the scheme to pay the final part of the premium. And that is often linked to the idea that the illiquid assets will be sold in the secondary market in that timeframe or perhaps in some cases it is to allow time to run off naturally if they are very close to the end of their lives.

Now deferred premiums again is something that trustees do need to think quite hard about, they need to think about what is the consequence of being unable to pay this premium in future, so what would happen if I could not get the money from my illiquid assets sale that I thought I was going to and actually it is short of the amount that I owe to the insurer. You are then in an environment where you have only insured 95% of the scheme, you do not really have any assets left to sweat to make up that difference, it is quite an uncomfortable position, certainly something that employers should be completely bought into, if trustees are going down that route. But that said, we have seen lots and lots of cases where deferred premium has been a really sensible solution and has made sense for the client and we are pleased to be able to support clients in doing that.

Now there are some other more complex solutions which are perhaps really mainly applicable for the very large schemes. Thinking about things like obtaining financing from a third party or restructuring the assets to make them more friendly to an insurers balance sheet and avoid some of those frictional issues with different regulatory regimes. Those can be really beneficial but it is a lot of investment, very complex, you need a trustee and an employer who have got real appetite to do some serious work in order to resolve these issues.

Finally, it is also worth thinking about well actually do we want to insure the whole scheme right now. Maybe we do not. Maybe we take out a section and insure most of it with a view to completing the rest of the transaction later. Maybe our insurer will agree to work with us to do a follow on transaction shortly afterwards. Every insurer I can think of would be really pleased to work with a client in that way.

So there are lots of different options. What I would really encourage schemes and advisers to do is to talk to the insurers, engage, think about the real specific of the case in question rather than trying to apply blanket rules, and there are lots of solutions which can get schemes where they need to be.

So then moving on to existing buy-ins. A little while ago it was very common for schemes to be insuring part of the scheme, so say a pensioner only either all their pension is or part of their pension is and that was an investment decision, de-risking decision.

Now many schemes are better funded, coming to the end of their life as a scheme as it were and looking to secure the rest of the scheme and trustees are faced with a question about whether they stick with their existing insurers, that they have just got one counterparty across the whole scheme or insure with someone else. Both of them are perfectly valid options and trustees should take advice on that.

But a few things worth thinking about. So one that I would really call out would be consistency of member experience, particularly if you have got deferred members secured with different insurers. Are all the members going to be benefitting from the same terms for member options, transfer values, cash commutation, will all members have at least an adequate level of service and care that trustees are happy with and ideally is consistent as possible.

One thing that I would really recommend if you are coming to market with an existing buy-in with another insurer, we find it really useful to hear from the client. These are the things that we have covered on our existing buy-in that we really care about and we want to make sure are consistent. That means that we have got that immediate visibility of what is it that is important and we can think about is that something we can do and there is no debate down the line.

Having existing buy-ins can be really helpful because it means you have got a relationship with an insurer who might be able to support you with price monitoring, might be able to help you think about how you can shape your investment strategy to get yourself in the best possible position.

Sara spoke a lot about residual risks and wraparound cover so I will not spend too much time on that right now but just to say I would agree with Sara's comments here that wraparound cover is fairly new, it has been done a few times. There is starting to become some precedence for how it can be done but does again, it takes thought, it takes engagement, it needs good co-operation from everyone involved.

Surplus, so is surplus a nice problem to have? Well I think it is because ultimately the job of a trustee is to secure the benefits and if they have done that and they have got money left over then great. I guess what you do not want though is to have a surplus to use and to spend so much time and money thinking about how you deal with that surplus, that you are not really adding any value to members through it.

We talked about residual risk cover and we will come back to that in some more detail in a moment.

Benefit augmentations are obviously, from a members perspective, fantastic. Getting even more than they were strictly entitled to. I think again thinking about our perspective on where we have been asked to look at enhancing benefits insured, trustees should think about and talk to insurers about how to do this in a way that adds real value to the members and is not going to just turn into significant risk premiums being paid to insurers. Not only does that usually come with something that is quite hard to administer but it is not really adding that value into members' pockets so often the simple solutions are best when it comes to benefit augmentations.

Just mentioning consultations going on at the moment and discussions around making it easier for surplus to be returned to sponsors outside of a buyout and wind-up situation. It is a really interesting topic and it will be interesting to see where the consultation goes. I think it is really challenging in practice and trustees need to obviously think very carefully about the strength of their sponsor if they are looking to return surplus funds ahead of a buyout.

Post buyout, obviously fewer challenges in that sense and as Sara said it comes down to what do the scheme rules say, who has the power but difficult judgements for trustees and sponsors to make.

So just to touch on some of the challenges for the very largest DB schemes out there and again, as Sara has covered many of the legal angles, talk a little bit more about the insurer side and some of the things that we think about.

The very large schemes, people, everyone thinks that big is always better but that does have to be weighed up against the very very significant capital requirements involved in taking on multi billion pound schemes. In addition to that insurers need to be thinking really hard about how they can trade up into their asset strategy at real scale as quickly as possible.

Really for these very large DB schemes the solutions are going to be entirely bespoke, there is nothing off the shelf whatsoever about something in the multi billion size and trustees, advisers, employers should all be looking to engage very very early with insurers to discuss their circumstances, think about what might be possible.

The other thing to note on this is that there is probably an impact on normal, so called normal sized schemes. If there are a few of these multi billion pound mega schemes in the market at once and insurers are looking to perhaps you know take down multi billions of liabilities in one go, then how is that going to impact on capacity for other transactions at the same time. Whether that is from a people resource perspective or from a capital perspective, it is going to add some really interesting dynamics particularly where these trades are happening towards the end of a financial year.

So talking about residual risks, so with residual risks there is a lot of different processes that we see being followed. Most schemes in my experience prefer to take out residual risks at the point of buy-in. That has a lot of advantages. It does add some time pressure though to the process so if that is something that trustees want to do they really need to be preparing themselves well in advance and making sure that their lawyers are helping them get themselves set up to make that work.

Now we see a lot of schemes coming to market with either a vendors report, so a legal advice report that has been prepared on behalf of the trustee but can be shared with insurers or a buyers report where the report is actually prepared on behalf of the insurers usually with the successful insurer paying the eventual costs for that.

I think both of those are really good because what they allow is early sight of any issues. So the worst-case scenario with residual risks is you go through six eight weeks of due diligence, people working very very hard, coming right up to the point where you are about to trade and then an issue comes up that no-one spotted before and actually no-one really quite knows what to do with it. Can we proceed, are the trustees happy to retain the risk, can the insurer get comfortable taking the risk and obviously the worst-case scenario is that the whole transaction falls over as a result which is in no-one's interest and potentially a disproportionate reaction for something that might, in the scheme of things, not be the biggest risk that the trustees are facing. So having early sight gives everyone time to think about how can we deal with this, what do we need to do, can we find any more information to help us get comfortable.

Now transitioning to buyout. So, there has been a bit of talk about capacity in the market and the constraints that we are seeing and Sara rightly pointed out a lot of the constraints are not necessarily on the insurers side but on the scheme administrator/adviser side where there is a real burden on people and a real constraint with people to get everything done and that does not stop at the point of transaction. So taking the scheme from the point of a buy-in transaction, all the way through to buyout is a really time consuming and resource intensive process. Particularly for schemes where there is quite a lot of data work still to be done.

Some schemes come to market and are really clear that they want to transition to buyout very quickly and by very quickly that might mean anything from within the same calendar quarter to inside of a year which might not sound very ambitious but for some schemes that really is ambitious.

There are lots of things that can be done in advance of a buy-in to make that transition as quick as possible. So communication again really important, trustees should be talking to the insurers, making sure their expectations they need to clear, understanding what the timeline might look like, making sure that everyone really does understand everything that needs to be done in that period and how it can work most efficiently, what can be done at the same time in parallel to speed things up. It goes without saying really that getting data in shape before a buy-in transaction is absolutely critical to ensuring a quick transition through to buyout. If the data is in very poor shape it is really going to be extremely challenging.

Thinking about member communications is also really important here. So as the insurer who will eventually be looking after the members as policyholders, we really want to make sure that that journey for members is a positive one, is clear, communicated really well so that they do not feel like something has happened without them really having any understanding of what is going on. They do not feel like it is a negative for them.

That concludes my presentation so I will hand back over to Joanne to take questions.

Joanne: Great, thanks very much both. So we are at quarter to one so we have probably got five to ten minutes for questions and we have had a few come through. Just turning to the first kind of theme which is really capacity in the market, so I guess Sara one of the things you mentioned was you know the change in what is regarded as perhaps a small scheme and a large scheme and I guess Rhian you might have thoughts on this as well. But when you say a large scheme, what do you actually mean by that in terms of size, that is one of the questions that has come through?

Sara: I think not long ago we thought anything over half a billion was a large scheme, now I think large is anything over a billion and I think, yes small is probably up to a couple of hundred million now whereas we would have thought it more around the 50 million mark before.

Joanne: Yes, that is helpful. Rhian I do not know if that kind of chimes with how you, I appreciate schemes are different and each transaction is different but how you kind of view things from an insurers perspective.

Rhian: Yes I would probably agree with that categorisation, I mean it is obviously very, every insurer will see things a bit differently. I guess I would also say if it is helpful that we would not really see any hard and fast rules, you know sub 200 we will/will not do this, over a billion we will/will not, every transaction is looked at on its own merits and considered case by case.

Joanne: Okay and I guess linked to the last point you have made, another question has come through which is how do you decide, as an insurer, which schemes to quote on and how competitively to quote on a given scheme particularly with the capacity crunch that I think we are all seeing in the market at the moment/

Rhian: Yes, so we have a sort of weekly triage process where we look at all the opportunities which have come through and look at our resource planning and figure out what we can quote on. So every insurer will be different here, so I am just speaking for Standard Life. But we are really looking for things like transaction certainty, and actually I probably can speak for everyone when I say that is a key criteria, you know are we confident this transaction is going to proceed. It is very rare to be honest now that the answer is no. Most schemes come to market very well prepared and with that certainty. We are looking at things like what is the resource requirement for this scheme and how does that weigh up against the size and the opportunity. So a scheme that is both small and very very complex or perhaps the data is not in very good shape and needs a lot of work, that is going to be harder to justify deploying our resource there. In terms of competitiveness, so I would say if we decide to quote on a transaction we always put our best foot forward but in particular where we have got you know really good relationships with the client already that we want to maintain, perhaps they are an existing client of ours. That would be situations where we would really put our best foot forward.

Joanne: Okay, no that is really helpful. Thank you. One question which relates to one of the cases that Sara mentioned, so the MTL Virgin Media case and I guess you might both have views on this. So the question is does the MTL Virgin Media case change your approach to residual risks? So it would be interesting to hear about that, you know Sara from your perspective but also Rhian from yours as well, if you have got any thoughts.

Sara: I suspect I know what the insurer answer is. In terms of the trustee answer or looking at it from a trustee perspective, I think it is important that the trustees think carefully and liaise with their sponsor on this point because I would say most insurers are going to exclude execution risk and if you do open up execution as something that you want covered to the extent an insurer will cover it in principle, that means they are going to crawl all over everything and take a very conservative view. So I think it is more an issue for trustees and what they are comfortable doing and so it becomes a discussion with the employer. So is the employer going to sit behind that risk, do they want anything of quantification of that risk, you know because if you are looking at buyout and all the assets are gone, if they are going to give an indemnity they want to know what that might be for so we have had some trustees and corporate want to have a peek to see whether there is a kind of real risk or not but it is quite tricky at the moment because obviously we are waiting for an appeal so there is no one right answer to this and it depends on the scheme and whether we think it is a theoretical risk or whether there is a kind of real risk and the trustees know whether this is an issue or not.

Rhian: I agree with that. I think from an insurer perspective to cover the risk on something as Sara said, you have got to go and do your due diligence so if we were normally execution risk it is something that is excluded as standard simply because it is so difficult to due diligence. Quite often we are talking about looking for a certificate written by the actuary upwards of 30 years ago, it is going to be really really hard to find. We see as well as the appeal, we are expecting that there will be some lobbying I think of DWP to put in if the appeal fails then helpful legislation to make sure that we are not looking at creating excess work, excess liability for no real value for anyone.

Joanne: Thanks both. So just turning to the issue of surplus, we have just had a question come through which Rhian I guess is perhaps one for you initially. When surplus is being used to augment benefits, what typically works best for insurers in terms of how benefits are augmented, so the shape of those benefits, so additional pension, higher increases etc? I do not know if you have a view on that at the moment.

Rhian: Yes, I guess the most simple option is a straight percentage uplift across the board and that means that all the cashflows from our perspective are exactly the same just uplifted a little. Things like higher pension increases, that works absolutely fine but I think trustees just need to bear in mind that if they come back after having already got pricing and say we want to increase, change the pension increases then that might change our investment strategy so it is not quite as simple as applying a percentage uplift to the benefits. We have seen more complex requests as well like enhanced factors, enhanced death in service benefits, again all things which are possible but just need to understand the implication and what that might do.

Joanne: Thank you. Okay, so I think we have got time for a couple more questions. Just thinking about smaller schemes, so I guess a couple. Request a contract term Sara. So the question is that this individual has been told that on small trades, schemes get the terms they are given, so small schemes. Is there any room for negotiation in your experience on those?

Sara: My view is yes, I mean if you do not ask you are not going to get. There might be good reasons why the insurers want to trade, they might have set aside capital and that their trade falls over so I think it would be daft to assume oh these are the standard terms I have got to get them. But I think there does need to be a bit of reality as to what you are asking for, if you are a small scheme. So that is when advice from brokers and lawyers is useful as to what is practical and where you are being a bit fanciful. But no I think unless you are going down a pre-negotiated route, if you have got standard terms you should ask but be mindful of what an insurer will give you if you are a small scheme.

Joanne: Thank you. And then I guess the final question for Rhian. So we were talking about how you know busy the market is at the moment and I think you alluded to the fact that being prepared is absolutely critical when you get asked to quote for a trade, so the question we have got is because the market is so busy will my small scheme even get a quote?

Rhian: So far I am not aware of any schemes who have come to market who have failed to get any quotes at all and I am saying that from my own perspective having spoken to all the other insurers and DBC's and lawyers, no-one can really identify cases where schemes are not getting quotes. So I think that is fantastic, I think it shows the market is really functioning very well. I think for schemes which are under say a 100 million in size we are certainly seeing quite frequently that there might only be one or two quotes being provided. I do not think that only one quote being available is necessarily a bad thing. I think in that situation trustees just need to make sure that their advisers are giving them strong advice on what represents good value and that might be different from scheme to scheme so, you know schemes, if your priority is just securing the benefits then it is good value, if it is affordable in one sense but equally the brokers know what normal pricing looks like. They can challenge an insurer if the price is not good and trustees I think should be able to put some confidence in that process.

Joanne: Okay, that is brilliant. Well thanks very much both of you. I think it has been a really interesting and useful session.

Given the time we are now going to draw to a close but before I do so I would just like to mention the second in our series of scheme sessions, which will take place at the same time next week, so 28 September, and in that one we have got two of our pensions dispute specialists, Aaron Dunning-Foreman and Charlotte Scholes who are looking at issues that can arise on schemes and as you prepare for risk transfer and look at commercial and pragmatic ways for dealing with those issues so as to not impact on the actual risk transfer timeline.

Also if you have got two minutes we would be really grateful if you could answer the feedback questions please that will pop up on your screens shortly and it just remains to be said thanks very much to our speakers and thanks all for attending. Hope to see you soon. Thank you.