A sponsoring employer decided to close their final salary scheme. The shortfall against the estimated buy-out cost was around £5 million. However, the advisers suggested the trustees shop around and approached another annuity provider. After some research, the trustees identified another product which matched their needs. They were amazed that by shopping around, the alternative product would save them £3 million!
However, this still left a pensions “black hole” of £2 million. The trustees approached the employer who initially paid £1.7 million into the trustee bank account, so that the liability could be settled. Two years later, the member data was 95% complete and the new Independent Trustee suggested, rather than delaying the buy-out any further why not buy-out the known liabilities.
The scheme consultant said that this was not usual. However, the Independent Trustee said it would be better to settle the known liabilities than wait. It was then discovered that a fall in gilt yields and new mortality tables released had nearly doubled the estimated liability. (That’s a further £2 million from the sponsoring employer!)
Here are some valuable lessons that can be learnt from the above.
- When buying out a liability – shop around. Make sure that you are buying exactly what you need to cover your legal requirements. Shopping around and buying exactly what you require may save you thousands of pounds. In the example above, this saved the employer about £3 million.
- Liability matching is not new. In the situation above, it would have been better to match your assets to your liabilities. Rather than hold the £1.7 million in cash it would have been better to have invested this money in gilts.
- Effective communication between the advisers and trustees could have mitigated the increased liability. For example, after the liability was not settled in say 3 months, the cash held on deposit could have been invested in gilts. Furthermore, the new mortality tables were not a surprise. The trustees should have been made aware of the potential exposure.
- Special situations require expert advice. Using an independent trustee who has the necessary knowledge and experience means that you can effectively challenge your advisers. You never know, they may not be giving you the best advice.
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