James Auty
James Auty
Partner, Mercer



When it comes to defined benefit (DB) buy-ins and buyouts, the big deals traditionally get the headlines while smaller schemes seem to get overlooked. But last year was different. After five transactions worth £3bn or more in 2019 the number of £1bn-plus deals fell in 2020 as the pandemic disrupted the market.


Insurers turned their attention to small and midsized schemes, resulting in a big increase in these deals. The number of transactions between £100m and £1bn rose by two-thirds and more than half of the year’s buyouts (77) were below £100m with 21 valued at less than £10m.


It’s therefore a good time to take a closer look at the challenges and opportunities facing schemes with assets under management (AUM) of less than £250m. When we talk to schemes in this group their expectations for a buyout are often low, either because they think insurers won’t be interested or the cost will be prohibitive.


This doesn’t have to be the case. Regardless of size, your scheme should and can have access to the ideas and options available to the bigger schemes. That’s why we are holding a series of webinars on the theme of ‘Punching above your (asset) weight’.



The first webinar in the series covered endgame planning and execution and featured a panel of experts discussing options and taking questions. Turnout was strong with 133 attendees representing both scheme trustees and sponsors of schemes with less than £250m AUM.


We took the opportunity to ask attendees two questions to find out about their plans and how they view the buyout market for small and midsized schemes. The results largely reflected what we hear from clients but also suggested many schemes need to think more carefully about their options and potential challenges.



What is your scheme’s current endgame?


As expected, buyout is the most popular option. It’s often seen as the gold standard that transfers all risks to an insurer and should be the best solution for the scheme and its members. The result for superfunds is also unsurprising, after all it’s early days for the superfunds but watch this space.


The other two categories were more thought-provoking. About one-third of schemes had no endgame in place, which was surprising and concerning. Almost a quarter of schemes were targeting runoff. This is understandable but many of these schemes will find that runoff may not be a viable option in the long run.


It may be that the schemes with no endgame are running on because they don’t think they will be able to secure a buyout at a good price. These schemes need to make sure they don’t sleepwalk into a longer-term runoff that is a bad deal for their members and their sponsor. They should be having discussions with their advisers to identify a specific endgame and ensuring that every decision they make helps them to get there.


In both cases it is easy to underestimate the costs involved in runoff. As schemes continue to mature and the number of members decreases it becomes particularly difficult for smaller schemes to predict the final cost of the scheme and a time will arrive when the scheme is paying out more than is coming in.


Governance is another requirement that becomes harder as schemes mature. When members retire so do trustees, taking with them a huge amount of scheme knowledge and leaving gaps that are increasingly difficult to fill. This is especially true because governance requirements are becoming ever more demanding.


Schemes need to consider whether they will have the capacity to meet governance obligations on the path to their endgame. Options along the spectrum of consolidation currently include professional trusteeship, fiduciary management – whether that be partial or full - DB master trusts and buyouts - all of which can improve smaller scheme governance and member outcomes.


Ultimately we expect 90% of schemes to end up targeting buyout as they mature. This may not be for another 10 or more years but it means many schemes planning for runoff for the time being need to be flexible and ready to switch when market conditions or the scheme’s situation make the time right. Schemes with no plan should consult their advisers, put an endgame in place and then reflect on how to get there. 





Do you believe a scheme looking to complete a buyout of less than £250m can achieve the same competitive pricing from insurers expected by a scheme completing a £1bn buyout?


Question one gave us an idea of where schemes are in terms of their endgame planning. Our second question helps shed light on what schemes expect is achievable.


Respondents overwhelmingly believe smaller schemes are at a disadvantage in seeking a buyout from an insurer. Less than 12% of respondents thought a scheme with less than £250m AUM could compete with the big schemes and more than a quarter appear not to have given the subject much thought.


Yet the evidence of 2020 is that these deals are happening. Even as bigger buyouts come back onstream, insurers will still be in the market for smaller deals if they are presented attractively.

There are two important points to bear in mind. First, insurers are hungry for buyouts because they make money from these deals. Even for schemes with less than £10m AUM it is possible to generate competition between insurers to get a good price.


Second, though buyouts are potentially profitable they are expensive for an insurer to put together. A buyout quote can cost an insurer about as much as a small family car – so to get insurers’ attention you need to be attractive and credible.


One way of doing this is by making sure your scheme and data are in the best possible shape, reducing the work the insurer has to do and the risk involved. Once this is done, the right adviser can use their contacts and credibility to get the insurer’s attention.  


Some advisers have streamlined the process by submitting multiple applications together, making it easier and cheaper for the insurer to produce a quote and increasing the chance of insurers competing for the business.  


As I said earlier, we believe the vast majority of schemes will end up opting for buyout even if they are currently planning to run off in the meantime. So an alternative way of thinking about our second question is to compare the potential buyout deal with the cost of runoff. 


A scheme with less than £250m AUM may not get as good a price as a £1bn-plus scheme but buyout may still be the best option. Your job is to get the best price possible when the time comes to approach insurers. This requires you to plan, be flexible and ensure your advisers present you with the full range of ideas and options. 


At Mercer we work with the very biggest DB schemes and some of the smallest to help them achieve their buyout goals. Our solutions, reputation and relationships allow us to offer the broadest range of options to schemes and attract the attention of the big insurers in the market. Please contact us if you would like to find out more.

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