Umbrellas are not only used for keeping the rain off, they are now associated with pensions de-risking.
Hail a cab in London and ask for “The Umbrella Shop” and chances are you will find yourself outside James Smith & Sons Umbrellas in their New Oxford Street shop - a largely unaltered example of a Victorian shop front design. They have been selling umbrellas since 1830, they and their premises have become an established landmark in London.
Umbrellas are not only used for keeping the rain off, weddings, corporate giveaways and occasionally providing shade during the great British summer; they are now associated with pensions de-risking. In the pensions insurance world, the term “umbrella” refers to a form of contract agreed between a pension scheme and an insurer (or insurers) to be used for multiple transactions, while maintaining the same terms.
The benefit for the scheme is that it can de-risk at times when pricing is favourable for it (typically by purchasing a buy-in), it has choice (more than one insurer can be part of the structure) and the process is cheaper (reduced legal fees) and quicker (using pre-agreed terms).
Timing is important. KPMG’s research shows that the difference between good and bad market timing on the premium can be up to 20%. Furthermore, schemes that transact in two weeks, as opposed to six months, were nine times more likely to achieve their pricing targets. Over the past 10 years the market has seen many multiple transactions complete, securing multi-billions of liabilities. New entrants to the market have already made use of these structures. KPMG has facilitated around 20 such transactions, saving schemes around 5% on average against their cost of removing risk. We use a structure called Accelerated Buy-in, which is further enhanced by price monitoring so that opportunities are spotted quickly.
A scheme can monitor its assets and insurance prices against an agreed target. The structure enables a transaction to be executed quickly, significantly improving the scheme’s chances of a successful outcome.
From the insurer’s perspective, having this structure means the transaction is much more efficient (less execution risk) and cheaper (less time spent negotiating the contracts) which is typically reflected in the pricing the scheme receives. In addition, the scheme and the insurer both gain from the relationship they build-up during the transaction. Insurers are constantly trying to gauge if a scheme will actually transact and therefore schemes with a transaction record are viewed positively and could be prioritised over schemes that have yet to transact. This filtering process reflects the insurer’s perception that the scheme wants to transact again, understands the processes and uses experienced advisers. These positive aspects are usually reflected in the pricing supplied by the insurers.
Like real umbrellas, these structures come in all different sizes. They aren’t just for large schemes. We have put this structure to use on trades as small as £10 million, as well as for many other smaller and medium size schemes over the past 10 years and we would be happy to discuss with any schemes interested in finding out more.
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