The new British Steel Pension Scheme is preparing to convert its four buy-in policies with Legal & General to buyout by the end of March next year. Ahead of the project, the administration services were transferred to L&G in October last year.

The trustees of the scheme sponsored by Tata Steel UK, in line with their objective of applying any unused surplus for the benefit of scheme members, have been working to plan for the buyout and eventual wind-up of the scheme, according to the latest member communication. 

“This is a highly regulated process and there are a number of steps the trustee must go through before it can take place, including completion of the scheme’s data cleansing work,” trustee chair Keith Greenfield told members. 

The trustee aims to be in a position to implement any member payments arising from the data cleansing work, distribute surplus and buy out member benefits by 31 March 2026. 

“Collectively, these tasks represent a major undertaking on behalf of the trustee, and achieving this challenging timetable will be greatly assisted by the additional resources available from Legal & General,” Greenfield said, referring to the changeover of its in-house administration services to the insurer.

The admin transfer to L&G and buyout are made as the trustee seeks to achieve certainty over the scheme’s running costs, so it can make further payments to members rather than holding excess reserves to cover uncertain scheme expenses.

The closed scheme had more than 80,000 members when it was created in 2018, falling to around 64,000 in March 2024. 

Many schemes have bought bulk annuities recently as funding levels have increased, and a large number will be looking to convert these to individual policies in the next few years. A buy-in contract normally already includes details about the conversion to buyout and typically has a data cleansing period of 12 to 24 months, says Tiziana Perrella, a professional trustee at Dalriada Trustees.

The ‘buy-in to buyout’ steps are fairly similar across different insurers though not identical, she says, adding that the process is reasonably onerous and inflexible. She argues that this is not unreasonable, “given that it is the one opportunity the scheme and insurer have to get things right”.

The buy-in to buyout process involves a number of scheme data cuts being interrogated and validated. The number of iterations is unknown at outset, but there can be many rounds of queries, which means it is difficult to anticipate how long it will take for the final data set and updated benefit specification to be mutually agreed, Perrella says.

“This introduces a significant amount of uncertainty over the timeline buy-in to buyout,” she warns. 

Even though insurers’ processes have improved over the years, progress has been “more than negated” by other issues, such as guaranteed minimum pension equalisation, the increased number of transactions and stretched admin resources, she says. 

However, there are ways for schemes to maximise efficiencies. For example, Perrella recommends seeking to understand insurer processes well enough so that trustees are able to support or challenge progress. They will want to make decisions quickly and pragmatically while keeping the sponsor informed, and trustees should also have the required oversight in place to ensure resources are available at the scheme and insurer’s end to look at the data and any queries as soon as they land. 

“The efficiencies are cumulative and can reduce the overall length of the process by a material amount of time,” says Perrella.

However, trustees need to recognise that the overall timescale is dictated by the nature of the process, therefore “there is a limit as to how quickly these exercises can be completed”. 

Once the final data is agreed, there are additional steps: the adjustment premium needs to be calculated, checked and settled, which takes about three months. 

“The trustees need to confirm to the insurer that they have fulfilled the buyout conditions – this may need additional comfort from the lawyer and administrator. Again, understanding the process and what it involves in respect of additional liaison with advisers is very important,” she advises. 

Consultancy Hymans Robertson recently found that three-quarters (76%) of professional trustees are experiencing delays in their buyout and wind-up processes following a full scheme buy-in. The average reported delay was six months, but some were delayed by more than two years.

Despite innovation and increased capacity from insurers to meet the growing demand in recent years, moving from buy-in to buyout requires a lot of resources, with data creating bottlenecks, the firm says, advising schemes to prepare early. 

Head of buyout and wind-up transition services Christine Cumming notes that of schemes that had completed their final full scheme buy-in, 97% are now looking to move to buyout within the next five years.

“With demand rising and delays becoming increasingly common in the buyout market, it’s crucial that schemes prepare early to get ahead of the curve,” she says.

Delays are becoming the norm in the buyout market where preparation was not started early enough, she adds, with insurers blaming schemes for not preparing enough for the conversion process.

“We have heard anecdotal evidence from insurers of multiple changes, in some cases as many as 30 prior to a final data set being agreed. This has adverse impacts on both the timing and costs, as well as potentially leading to knock-on effects for members,” she says.