Mastering pension buy-ins: addressing the administration challenges
What should trustees be prepared for before undertaking a pension buy-in? Katie Stone shares some key insights from recently completed projects.
Mastering pension buy-ins: addressing the administration challenges
Introduction
A pension buy-in is a significant undertaking that comes with its own set of complexities and challenges. These can have an impact on various stakeholders, from the scheme and its sponsor to the end members. This article aims to shed light on some of the key administration challenges and lessons learned from our recent experience of delivering these projects.
Lack of a fully reviewed benefit specification
A frequently overlooked issue is the absence of a comprehensive benefit specification that has received the nod from all key stakeholders, such as the actuary and legal advisors. The lack of a unified document can cause confusion and create potential roadblocks as the transaction progresses.
Data readiness
Data readiness is a cornerstone for the successful completion of a buy-in. One common issue revolves around missing or incomplete data, particularly relating to contingent spouses’ information and liabilities. Given that this data directly impacts the pricing and risk assessment of the buy-in, gaps can complicate matters. Addressing these gaps is often a time-consuming process requiring verification and data collection. This might involve marital status screening and recalculation of spouses’ benefits from a first-principles approach.
At Trafalgar House, our specialist pension project teams take the lead in these activities, ensuring that data, including that of spouses and contingent spouses, is accurate and complete. But, with demand for project resources being at an all-time high, and the timescales for these projects often being very tight, it’s recommended that schemes don’t wait for buy-in or buy-out discussions to start before this work is commissioned.
Impact on member experience
One of the most immediate and palpable impacts of a buy-in occurs during the initial phase, affecting both members and general administration workflows. As insurers assume responsibility for performing key calculations such as transfers and retirements, the existing automation set up by the administrator essentially becomes redundant. This transition can create an operational gap and necessitates a reassessment of the resources that were once streamlined for these automated tasks.
Furthermore, it’s worth noting that end member response times can increase considerably during this phase. Members who have grown accustomed to prompt service may find elongated wait times particularly taxing. This shift not only results in a surge of member enquiries, but also places additional strain on administrative resources, compounding delays and affecting member satisfaction.
By taking this into account early on, pension schemes can prepare more effectively for the operational shifts that accompany a buy-in or buy-out, thereby minimising negative impact on members and administrative efficiency.
Service gaps
In striving for the quick execution of a buy-in transaction, certain aspects of service may fall by the wayside. Insurers, for instance, may find it challenging to perform complex calculations or, as was the case in one of our recent projects, even produce tax-free cash calculations.
Online services
There is also the concern around the abrupt discontinuation of online services for members. Insurers may decide to take down existing platforms without immediate replacements being available, leaving members without digital access to vital pension information.
Insurers may decide to take down existing platforms without immediate replacements being available, leaving members without digital access to vital pension information.
Increased support demands
Another challenge arises in resourcing and continuing to support the interim service. The influx of questions from both members and the insurer demands robust internal processes and a well-resourced team that can effectively manage the increase in activity.
Key lessons
- Early data readiness: Initiating work on data readiness earlier than anticipated can pre-empt a host of challenges.
- Anticipate service gaps: Prepare to step in to fill service gaps, especially when it comes to complex calculations and specific member benefits.
- Online services contingency: Have a contingency plan in place for potential discontinuation of online services.
- Robust support structure: Gear up for an increase in support demands by prepping your internal teams for a surge in administrative tasks and queries.
Conclusion
Navigating the intricacies of a buy-in demands meticulous planning and proactive oversight. By promptly identifying potential challenges and applying insights from previous experiences, trustees can achieve a more streamlined process. This not only benefits all stakeholders but also ensures that member experience remains central to the project.
