Out-Law Analysis 4 min. read
11 Jul 2023, 2:26 pm
Trustees of pension schemes should consider some core questions to help them reduce risk when executing pension scheme longevity transactions.
Consideration of the questions can help trustees regardless of which of the structured options they select for the transaction. Those options are:
Where the insurer is in the same group as the trustee, will – and, if so, to what extent will – the same lawyers advise both the trustee and insurer? The insurer may well require certain structural and commercial issues to be taken into account and, where these are identified late in the day, they may introduce execution risk when other more commercial terms have already been settled.
Also, lawyers may not be able to advise both the insurer and the trustee late into the transaction where they have already advised one of those parties on a more partisan basis.
Where a third-party is providing, for example, collateral management, pensions administration or custodian services, are there any specific requirements that that provider requires or limitations as to what it can provide which may need to be taken into account?
Trustees may also wish to consider the gap between any limitations of liability imposed by a service provider and those agreed under the transaction documents themselves.
Any third-party service providers should be identified and engaged as early as practicable in the transaction timeline.
If so, the trustee will need to ensure that the liabilities relating to each section are met out of the relevant section of the scheme and that there is no contagion risk. Where we have seen sectionalised schemes insuring longevity risk, separate documentation is typically completed in respect of each section to maintain legal separation of the contractual arrangements.
Structurally, each set of transaction documents can be independent. Commercially, however, it may have been agreed that components be aggregated so that they operate economically as a single transaction. This will need to be considered upfront at the structuring stage. An example is where a single pricing basis and fee has been applied to each section irrespective of the extent to which the underlying experience differs.
A hot topic is the extent to which the trustee is keen to have the flexibility to efficiently convert the longevity insurance to a bulk annuity policy and, therefore, the longevity reinsurance to a reinsurance of a bulk annuity policy rather than a reinsurance of a longevity insurance policy.
This may also impact which intermediary the trustee chooses to transact with for longevity insurance purposes and which reinsurer the trustee chooses to transact with.
From experience, trustees and reinsurers are generally commercially aligned but may be diametrically opposed to what they are willing to commit to contractually. A trustee may wish to commit a reinsurer to reinsure a bulk annuity policy regardless of, for example, whether it is the insured population. Reinsurers may wish to ensure that they are, for example, happy with the identity of the insurer and other factors before they are willing to so commit. There is a risk that the trustee requests broad rights for future flexibility which the reinsurer is only willing to accept subject to strict and tight parameters which may effectively neutralise much of the flexibility.
Trustees may wish to identify what type of flexibility is likely to be practically most relevant and then gauge with the various reinsurers what contractual comfort they are willing to provide that they will continue to reinsure on that basis.
We have seen that different reinsurers are willing to accept materially different commercial terms which may create value for a trustee or insurer. This can range from amounts payable on termination and any data error remedy, to more administrative matters such as lengths of time after which suspended beneficiaries are treated as deceased, to requiring full payroll information. Trustees should identify what other terms are important upfront to ensure that these are on the negotiating table.
Data may be shared for pricing purposes and therefore all relevant data protection matters may need to be considered at an early stage. This would be relevant not just for the reinsurers but also for any off-shore captive insurer. Even if data is anonymised, it does not mean that there are no data protection issues. This is because of the possibility of re-identification.
Each of the three different structure options present different legal and commercial structuring issues which trustees would find useful to identify and resolve upfront.
Get lawyers involved early. We see lawyers and consultants as being opposite sides of the same coin, both of whom can bring knowledge and experience to the table when considering the structure of deals and the alternatives available, overall commercial terms and process, which can help to reduce execution risk.
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