The latest Pensions De-Risking Podcast from international law firm Herbert Smith Freehills (HSF) has been released, focusing on the subject of ‘residual risks’ buyout – from what they are, to how schemes should prepare for them.
In this episode, I joined the panel to discuss the subject with HSF host Tim Smith, Professional Support Lawyer, Pensions and HSF guest Ben Seth, Senior Associate, Pensions.
The bulk annuity market continues to grow with transaction volumes approaching £40bn during 2019 – a new record. There are a number of different ways of structuring a buyout, with a residual risks – also known as an ‘all-risks’ – buyout, one of the options that sponsors and trustees may be advised to consider.
This differs from a standard buy-in or buyout transaction, in which the only liabilities insured are the benefits that trustees or sponsors have specified in their benefit specification.
"A residual risks transaction goes further, insuring against additional risks such as trustees insuring incorrect benefits or the risk of beneficiaries being erroneously left out of the data."
Asked if residual risk cover is right for every transaction, my position is that it’s important for sponsors and trustees to ask themselves whether they really need this cover, in addition to considering what cover may be available. Aside to it coming at additional cost, residual risks cover can complicate a transaction, demanding more disclosure to the insurer, as well as more time and cost in preparation.
That said, while some will be fine with a regular bulk annuity transaction, others may be better placed to consider residual risks, such as when sponsors or trustees are looking for as clean a break as possible from scheme liabilities.
I go into the different dynamics and drivers behind residual risks cover in the full episode below.