Kelvin Wilson
Improved funding levels are enabling a growing number of schemes to consider and complete bulk purchase annuities (BPA), propelling the pension risk transfer (PRT) market towards another record year in 2024, both in terms of number of transactions and combined value.
While schemes and insurers continue to ride the wave swelled by improved scheme funding levels, it presents a new challenge for Guaranteed Minimum Pension equalisation (GMPe) assessment.
Previously, schemes might have been willing to tackle GMP as part of the overall risk transfer process. However, with the allure of faster buy-in deals, many are, understandably, prioritising speed and bypassing the GMPe hurdle.
However, conducting GMPe work during the buy-in stage of BPA transactions can present backlog risk that could delay schemes completing buyouts in their desired timeframe – particularly if they are also undertaking important data cleansing work. Buyout, the issuing of individual annuity policies to members and scheme wind-up are all contingent on GMPe work having completed.
Tackling a GMPe bottleneck
GMPe by its very nature involves intricate calculations, multiple stages and data interrogation and analysis to ensure entitlements are accurately reflected in the buyout price. It’s typically a time-consuming and laborious exercise and, in some cases, can take well over a year to finalise. For schemes ready and eager to secure full buyout and individual policies today, a lengthy delay to complete GMPe is far from ideal.
From an insurers point of view too, they are understandably hesitant to take on the added workload associated with GMPe due to the potential scale of the task and associated cost implications. In an ironic twist, this creates a situation where the very process designed to protect pensioners' benefits can become a roadblock to a desired securing of benefits with an insurance company.
Where schemes have not taken the lead to address GMPe, insurers will reflect the additional workload and risk in charging a higher premium. Schemes must weigh the cost of undertaking GMPe work with the benefits of a smoother transaction and potential lower than otherwise insurance premium.
With every challenge comes opportunity
There are solutions entering the market that enable schemes to factor GMPe work into the PRT process: solutions that can dramatically reduce the time required to complete GMPe work at scale.
Being able to automate and efficiently tackle GMPe, without compromising accuracy, will allow schemes to experience significantly reduced project timelines. This translates to lowering time costs, faster buyout completion and achieving their PRT endgame in the desired timeframe.
Stakeholders benefit from the above: Trustees and advisors can focus on value-adding BPA negotiations and structuring and there is reduced administrative burden. An efficient GMPe solution will be welcomed by insurers as it will bring greater clarity on a scheme’s preparedness. This will help insurers to develop more favourable risk-reward propositions, creating a more attractive market for everyone involved. Addressing the GMPe remediation work is essential for achieving successful outcomes.
As the BPA market continue to be buoyed by a strong talewind, staying ahead of challenges like GMPe is crucial.
Learn more about how Heywood's data and benefits calculations expertise can help schemes navigate the hurdles and complexities associated with end-game journeys, including tackling important GMPe projects.
Read more of our pension risk transfer insights:
- Transforming member communications in pension de-risking
- The power of accurate data for pension risk transfers
- Mastering member communications in de-risking
- Exploring Pension Liabilities Calculations for Buy-ins and Buy-outs
- Effective Member Communication in Pension Buy-ins and Buy-outs
- How Insurers Drive Pension De-Risking through Bulk Annuity Purchases
