Overcoming challenges to facilitate an insurance buy-in

We had previously assisted the client to implement two Asset-Backed Contribution (ABC) arrangements to efficiently fund their defined benefit pension scheme.

Due to improvement in the funding level, the client wanted to explore the feasibility of an insurance buy-in and to take advantage of attractive pricing in the insurance market.

However, there were a number of challenges to overcome:

• The two ABC arrangements would have to be unwound and the tax and accounting implications addressed
• The client and the trustee would need to agree a payment in lieu of the ABCs, ensuring this was structured tax efficiently and avoided triggering any ‘value-shifting’ charges
• The scheme had a significant proportion of illiquid assets which could not be used to fund the insurance premium.

With our unrivalled experience and knowledge of ABCs, including the ability to deal with the tax and accounting implications, we quickly developed a steps plan that meant the ABCs could be unwound in an efficient way.  We also ensured we addressed the possible obstacles that the trustees would need to overcome in agreeing to the structure.

In particular we proposed a payment arrangement to provide the necessary funds to pay the initial buy-in premium and top-ups and to reflect the removal of the ABCs that was structured to minimise the impact of the pension spreading rules and to dovetail with the commercial arrangements.

While the client had already negotiated a deferred premium arrangement for the payment for part of the insurance buy-in, we structured a loan facility arrangement from the client to the trustees to provide the necessary liquidity over the deferral period.  We had to ensure this addressed the uncertainty over the actual realisation proceeds from the illiquid assets and to appropriately protect the position of both the company and trustee. This included an innovative option mechanic to give maximum flexibility over the timing of the realisation while ensuring the deferred premium could be paid on time and the loan repaid.

At the outset, the project required a number of challenging constraints to be overcome in a short period of time to optimise the insurance pricing and reflecting the need to transact over the company year end for accounting and tax reasons.  However, rising to such challenges is in Isio’s DNA and we delivered a workable solution from the client that resulted in a full buy-in, securing members’ benefits, that met all the key objectives of the company.