Out-Law Analysis 3 min. read

Pensions risk transfer: requested contractual terms

It is common practice for trustees to seek commitments from insurers about the extent to which they can accommodate core legal and commercial terms before exclusivity over the transaction is granted.

Trustees have looked at insurers’ ‘requested contractual terms’ (RCTs) responses as a means of differentiating between similar proposals and selecting a preferred insurer.

The case for RCTs

The case for RCTs is strong. In a very busy market, trustees are aware that they have more leverage to secure favourable terms via the RCT process before they proceed to exclusivity with an insurer. There are also the specific circumstances of the scheme to consider. As more and more schemes are planning to move quickly from full buy-in to buy-out, it is more important than ever that buy-in terms are sufficiently flexible and fit for purpose. This is so trustees can efficiently navigate things like GMP equalisation and dealing with tax issues on switching to buy-out.

The employer lens is increasingly relevant to RCTs as well. For example, employers will often be keen to understand things like the extent to which the buy-in policy will force trustees to make recoveries under employer indemnities to settle amounts owing to the insurer following a trustee breach.

Read more on pensions risk transfer

The RCT process

There are various ways of running an RCT process. Many employee benefit consultants (EBCs) and law firms have their own standard list of RCTs and this can be an efficient way of assessing how different insurers measure up. However, in recent transactions, we found it beneficial to prepare a more bespoke shortlist of RCTs, tailored to take account of the strengths and weaknesses of each preferred insurers’ standards terms. Although this requires some additional legal work upfront, there are several benefits to this approach:

  • it removes the need for the parties to engage on points which are largely addressed in the insurer’s standard terms, giving more focus to pre-exclusivity negotiations. This in turn gives greater transparency and clear messaging to the insurers about how they can adopt their proposals to address the trustees’ main concerns. Provided that they respond in kind, this will give trustees a high degree of confidence in proceeding to exclusivity with their preferred insurer, reducing the risk of the transaction falling through;
  • a more bespoke approach can also help to maintain insurer engagement on the issues that really matter, for those trustees whose bargaining power is more limited;
  • some examples of RCTs might include the freedom to correct benefits during the life of a policy after data cleanse without onerous conditions, and pre-agreed data warranties wording. The latter can be important from a practical process perspective due to the need to line up the governance processes and supporting assurances from advisers.

In a busy market where insurers’ standard terms are increasingly reasonable and already cover many common RCT points, trustees will want to consider whether the bespoke approach is right for them. 

More bespoke RCT approaches

On one project we worked on, there was an extensive bespoke RCT phase that involved reviewing RCTs of six different insurers in parallel. This review was conducted over two stages, the second stage involving an interaction with the insurers to negotiate improved RCT positions. One insurer refused to engage during the first round but still proceeded to the second round purely due to pricing.

This example raises the question of whether there is much to be gained in the bespoke approach. Phasing the RCTs over two stages in this way involved a lot of work. Perhaps a more comprehensive but generic RCTs process would have been more effective, particularly given that core legal points and detail will still require negotiation once a preferred insurer has been selected. 

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