28 November 2024
6 min
Actuarial Consultant
The iconic Friends story line where Ross and Rachel debate the meaning of “We were on a break!” comes to mind when we think of the term ‘clean break’. Like Ross and Rachel’s on-again, off-again romance, a pension insurance buy-out, often viewed as a clean break for employers, isn’t always so straightforward.
Below we’ve explored some key questions to help untangle the complexities, much like trying to figure out Ross and Rachel’s relationship status.
Not necessarily. While a buy-out will cover the majority of financial and non-financial risks, there may be certain exclusions or uninsured benefits from the final policy or policies. Simply declaring “we were on a break!”, may not be enough and often employers are being asked, late in the day, to provide indemnities for if a claim is made on these exclusions or uninsured benefits post buy-out and wind-up.
Much like Ross' ill-fated decisions during the infamous break, these surprises can lead to some uncomfortable moments if not addressed early on.
There are several options to cover the residual risks not covered by a buy-out policy:
Residual risk cover: larger schemes can obtain residual risks cover from the insurer offering the buy-out policy, however many risks are excluded from such cover.
Run-off cover: can protect Trustees in certain circumstances.
Employer indemnities: employers will likely be asked to provide an indemnity to cover remaining risks, although they could refuse or limit its scope.
In practice, claiming against these sorts of policies or an indemnity is a largely untested market, and there may be certain limitation periods on when a claim can be made. Even if an indemnity isn’t provided, based on the principles of trust law, there is a question around whether the employer could still be on the hook.
The best time to address residual risks is before the buy-in stage. Delaying these discussions can derail a buy-out and lead to costly surprises. Looking at this in detail ahead of the decision on whether to settle or not is essential.
Discussions with insurers at the full scheme buy-in stage, will include provisions around future residual risk the insurers will be willing to consider, making it even more important to discuss residual risk as early as possible. This is relevant even for those completing a partial buy-in, as the insurer may not be able to provide the desired residual risk cover once a scheme is fully bought in.
Naturally, when asked for an indemnity this triggers questions from the employer on how confident they can be that claims will not emerge in the future and the level of materiality. Advisor support, both by employer and trustee advisers, is key here in being able to provide the employer with the facts and robust due diligence to allow them to clearly understand the situation before making a decision.
If you’ve agreed to a buy-out and this hasn’t been discussed, then this needs to be raised as soon as possible. Failing to tackle residual risks early can leave employers unprepared and vulnerable to unexpected liabilities.
During the decision on whether to settle or not, we can look to:
Understand the scope of due diligence being carried out by the scheme against market standards and assess the likelihood of residual risk.
Explore what other insurance options may be available to you for residual risks.
Strike the right balance between reassurance and pragmatism (and not looking to find problems).
If you’re ready to navigate this journey with confidence, get in touch with our corporate DB team. We promise to be there for you (cue Friends theme song).
Please note we are not legal advisors, the issues set out above are complex legal matters and you should also look to seek legal advice on these.
Hymans Robertson LLP is authorised and regulated by the Financial Conduct Authority and licensed by the Institute and Faculty of Actuaries for a range of investment business activities.
This blog is based upon our understanding of events as at the date of publication. It is a general summary of topical matters and should not be regarded as financial advice. It should not be considered a substitute for professional advice on specific circumstances and objectives. Where this blog refers to legal matters please note that Hymans Robertson LLP is not qualified to provide legal opinion and therefore you may wish to obtain independent legal advice to consider any relevant law and/or regulation. Please read our Terms of Use - Hymans Robertson.
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