Foreword
Pension fund trustees are faced with an ever increasing number of major challenges around scheme funding. Increased scheme longevity coupled with the turbulent investment environment mean that professional advisers continue to flag the issue of long term pension risk and the various options available to mitigate that risk. The spectrum of risk is broad and trustees, along with advisers and corporate sponsors, must decide where their DB scheme fits and its future direction of travel.
As a contribution to the DB de-risking debate the NAPF welcomes this Good Practice Guide. It is important that trustees – as fiduciaries acting in the best interests of all scheme members – should fully understand the key aspects of the bulk insurance solutions available to them as a de-risking tool. While there is no substitute for actuarial, legal and risk management advice from qualified professionals, this Guide can be a helpful source of reference with which to navigate this one aspect of the complex de-risking process.
Although scheme specific and external factors will impact upon the pace of de-risking, trustees need to keep under review the options open to them. A clear presentation of the buy out/buy-in debate is useful in setting out the options and can provide reassurance that any action taken has been properly thought through. The NAPF is the leading voice of workplace pension provision in the UK and represents 1,200 pension funds drawn from all parts of the economy which hold assets of £800 billion.
Darren Philp
Director of Policy
Executive Summary
5
Introduction
6
Acknowledgements
7
Part I: Buy-in/Buyout Process
8
1. Preparation for Buy-in/buyout
9
2. Approach
15
3. Request for proposal
17
4. Final quotation
20
5. Pre-implementation
26
6. Implementation
33
7. On-going administration
37
Part II: Other Important Considerations
42
8. Impact of the Pension Protection Fund
43
9. Trustee liability and protection
47
10. GMP equalisation
50
11. Data risk transfer
53
12. Longevity insurance
56
13. Liability Management
59
14. Treating Customers Fairly
62
Executive Summary
Welcome to this guide to good practice on the subject matter of bulk insured pension funds and ‘de-risking’.
This guide will
• give you an overview of some of the options that are available, focusing on the process of pension scheme Buy-in/Buyout.
• provide you with some essential preparation objectives of a Buy-in or Buyout, to facilitate a smooth, speedy and focused process.
• help you to consider the essential steps necessary for successful completion of a potentially complicated undertaking.
•point you towards some of the legal requirements in key areas such as: discretionary benefits; partial Buy-ins; and the role of the Pension Protection Fund (PPF).
The guide also contains a glossary of terms to help you understand the language used in Buy-in/Buyout transactions.
Whilst it will not answer all questions that you might have, nor spare you the cost of collaborating with external advisors etc. We hope this guide will simplify the decision-making process for you and, in areas where you may have uncertainty, point you in at least the right direction.
The guide was written by a group of like-minded insurers, employee benefits
consultants, and lawyers, led by Margaret Snowdon of Lucida. On Page 8 you will find the list of contributors who freely gave their time to produce this document. We are also grateful for the support of the NAPF, the Pensions Regulator and the PPF. We hope you enjoy reading this guide, and are always keen to hear your feedback and any particular views you may have.
Hugh Savill
Director, Prudential Regulation and Taxation
Association of British Insurers
Darren Philp
Director of Policy National Association of Pension Funds (NAPF)
Introduction
The Buyout market is not new, but it has changed over the last few years and not a week goes by without Buyout being mentioned in the press. In the aftermath of the financial crisis, Buyout activity has been buoyant with various options and product offerings available.
On the other hand, trustees have probably never been as confused as they are now and despite all the press coverage there seems to be little literature available to explain the how’s and why’s, what Buyout actually means and most importantly whether or not and by whom it should be considered as a valuable option. But where should one start?
This guide aims to help trustees and any other interested parties understand the world of Buyout, explain it in laymen’s terms and set out best practice. Page 9 contains a visual representation of the entire buyout process.
Buyout is a broad term used to cover situations where the assets and liabilities of a Defined Benefit (DB) pension scheme are taken over by an insurance company. It is no longer simply the solution of last resort but in many cases has become the preferred way to transfer risks from a DB pension scheme.
Buyout is considered as the ‘end step’ in a phased de-risking solution, including liability management exercises (enhanced transfer values (ETV), pensions increase exchanges (PIE) and enhanced early retirement) designed to provide members with more choice and improve the funding situation for remaining members.
Buyout can be a very powerful tool in a company’s and trustees’ armoury to facilitate a corporate transaction, but it is important to understand what one is (or is not) buying. Choosing the right insurer to help you on this journey, whether it is a long term de-risking plan or a short term solution to an acute commercial problem, is therefore pivotal.
Several corporate deals have failed because of the uncertain and volatile liabilities in a DB pension scheme: the well-publicised J Sainsbury case illustrates the critical nature of the pension plan in corporate activity.
Insurance companies can provide tailored and innovative solutions to suit your circumstances and budget, but independent professional advice will always be needed. This could be from your existing scheme advisers, for example actuary, consultant, lawyer, etc. but often external experts are sought for their specialist knowledge of de-risking solutions and the players in the market. Therefore, trustees and companies must select their advisers with care to ensure they get the right advice and the right outcome as well as the right value to the scheme.
As expert advice and a clear understanding of all available options is very important – it should also be in the interests of the trustees to be well informed and not have to rely on their advisors’ recommendations blindly.
Acknowledgements
We are extremely grateful to the following organisations for giving their
time freely to prepare this guide:
CMS Cameron McKenna
Hymans Robertson
Lane Clark & Peacock
Law Debenture
Legal & General
Lucida
MetLife
Pension Insurance Corporation
Prudential
Part I: The Buy-in/Buyout process
Stake holder
engagement Understandingscheme and aims
The importance
of accurate data Investment strategy review Legal Considerations Feasibility
• employer • advisers • trustees • risks faced • objectives • funding level • availability of extra funding • aims of de-risking exercise • constraints
• carry out audit of scheme data • assess potential impact on availability/ pricing of de-risking solutions • potential impact of scheme’s portfolio on pricing of solutions • review of scheme rules to check trustee powers • codify the exact benefits involved and the extent of trustee discretions • possible solutions available • assess affordability • decision in principle to proceed with Buyout
Pre-Implementation Implementation Ongoing administration and
services (if appropriate)
• contract negotiation
• asset transition/disinvestment arrangements
• preparing for the transaction
• data cleansing/verification • data migration
• final premium payment
• shadow administration in buy-in • policy administration in buyout • policy holder options
• valuations
• monitoring and reporting • member communication
Approach
• consider approach to exercise (full market/auction/bespoke)
Request for proposal
• use summary data to obtain high level estimated quote • complex benefit structures could be simplified at this point • typically invite three to five providers to quote
Final quotation (up to eight weeks)
• provide sufficient scheme information and data to allow providers to produce accurate quotations
• record and circulate all updates and agreed assumptions to ensure consistency of quotations
• derive shortlist based on all relevant factors
• engage formally into a mutual exclusivity agreement
Preparation
Quotation Process
1. Preparation for Buy-in/Buyout
• Transferring pension risks can be complex and involve many stakeholders. The key to success is the right preparation. This chapter highlights the main actions and issues that need to be considered.
• Engagement of all stakeholders from the outset is essential. A working group consisting of the key stakeholders will help the process run smoothly and efficiently.
•One of the first steps is to understand your scheme in terms of the risks faced and their concentrations, the objectives of the different stakeholders, the level of funding of the scheme and what, if any, extra funding is available. Once this is understood it should be possible to outline the aims of the de-risking in the context of any financial and other constraints, to ensure that the de-risking will deliver the outcome sought.
• Accurate scheme data is essential to pricing of de-risking solutions. As part of the preparation prior to approaching the market for quotations, an audit of the scheme data could be performed and cleansing considered where data is found to be inaccurate. These steps will improve the speed of response and comparability of quote from solution providers but will need to be balanced against the potential costs of delaying a de-risking.
• Another factor to consider is the investment strategy of the scheme, as the right strategy put in place before de-risking can reduce the net cost. •The trustees must be legally able to complete a de-risking and not prevented
in any way by the Trust Deed, the scheme rules or legislation. The exact benefits provided under the scheme must be defined. Where there are discretionary benefits, decisions need to be made on whether, and how, these are to be converted into entitlements – as insurers will not normally take on discretionary powers.
• A feasibility study at the outset provides the opportunity to design and “test” a solution while ensuring that valuable time and resources are not wasted. This will ensure the support of all stakeholders is obtained before a decision to proceed (in principle) is reached and greater expense incurred.
Pension risk transfer, through an insured solution such as a Buy-in or Buyout, is likely to be a new and potentially one-off experience for many trustees and employers. It typically involves a complex set of tasks and considerations requiring interaction between the employer, trustees, their respective advisers, and at a later stage, the insurer of choice. The key to a successful transfer is to engage all the relevant parties from the very early stages, ensuring everyone is on the same level with regard to data preparation, the review of investment strategies and the consideration of legal aspects. The following section will outline these considerations in further detail.
“The key to a successful
transfer is to engage
all the relevant parties
from the very early
stages, ensuring
everyone is on the same
level with regard to data
preparation, the review
of investment strategies
and the consideration of
legal aspects.”
1.1. Stakeholder engagement
One of the greatest challenges in a Buy-in or Buyout process is to ensure agreement between the various stakeholders involved. These can range from external service providers, such as investment managers and administrators, to internal parties, such as trustees and employers. Each of the key stakeholders involved plays an important role in the process as outlined below:
Trustees – The trustees are the key stakeholder in the risk transfer process as they are the party who will decide whether to go ahead with the Buy-in or Buyout and will, therefore, select the insurer with whom the pension benefits are to be secured.
Employer – The employer is often required to contribute towards the Buyout or Buy-in premium or other de-risking costs and thus is an important stakeholder in de-risking. Insurers may be less willing to engage in de-risking discussions where an employer has not been involved in the overall process.
Advisers – External stakeholders are also critical to the success of the transition. They are best involved from an early stage. Asset structure is a key part of any bulk annuity transaction so investment consultants can play an important role in assisting trustees in this area. Third party administrators can also be heavily involved, from providing the data extract on which the insurer will provide their quotation to liaising with the insurer through data cleansing and on-going administration. One method of achieving consensus efficiently is to establish a de-risking working group or subcommittee, which includes representation from the key stakeholders. It would be advisable to put in place a delegated structure that avoids the need to consult the full Trustee Board at every stage. Ideally, the committee would have an “agreed terms of reference” in place under which they can act, with appropriate delegated authority. This subcommittee would often ask for a feasibility study to consider the various issues and assess the overall suitability of an insured solution for pension risk transfer. A specialist benefit consultant is often well placed to help trustees with this work, which can save considerable time and energy in the long run.
1.2. Understanding the scheme and aims
Once a subcommittee has been established, with the explicit task of investigating de-risking options for the pension scheme, one of its first tasks will be to
understand all the various risks faced by the scheme and any risk concentration that specifically needs to be addressed.
Additional factors that will need to be considered are the risk management, financial and business objectives of the trustees and the employer, funding levels of the scheme and any potential additional funding requirement.
To get an accurate view of the scheme’s funding position, the trustees should review the assumptions used in the valuation of the scheme’s liabilities,
particularly if the mortality assumptions have not been reviewed for some time. An understanding of the scheme’s main risks as well as an accurate valuation of the scheme’s assets and liabilities should be sufficient for the trustees to make an informed decision whether to consider a Buy-in or Buyout.
Larger pension schemes especially may also wish to consider insuring a subset of liabilities in order to de-risk in stages, either through a quota share approach (for example a percentage of each member’s liability) or by segmenting the population by age, category etc.
Following a valuation of the scheme’s assets and liabilities, it is then important for the trustees and employer to outline their aims vs. any constraints with regard to the de-risking exercise.
This will have an impact on the structure of the overall exercise, for example, whether or not full Buyout will become a short or medium term aim and whether there are any restrictions on funding available from the employer which might limit the extent of the exercise. Similarly, the employer may have specific aims which have an impact on timing, i.e. completing the exercise before the financial year-end.
Trustees should discuss these aims and constraints with their benefit consultant at the start of the process to ensure that the exercise will deliver what is required.
1.3. The importance of accurate data
As trustees are well aware, especially given the focus of the Pensions Regulator, good data is crucial throughout the life of a pension scheme.
See also the Pensions Regulator’s Guidance on Record Keeping:
http://www.thepensionsregulator.gov.uk/guidance/guidance-record-keeping.aspx Poor record keeping can lead to significant additional costs in a number of areas including administration, inaccurate actuarial valuations and even claims from
disgruntled members. For many schemes, the full extent of poor record keeping is only realised after a major event in the scheme’s lifecycle (for example, when a scheme de-risks or a wind-up is triggered). However, data cleansing at that point is often too late. In preparation of a Buy-in or Buyout, trustees should carry out a thorough audit of scheme data to ensure member records are accurate and up-to-date.
Where issues exist, data cleansing should be considered prior to approaching the market for quotations. This is because poor data can have a number of effects on the quote process. Inaccurate data can increase the time it takes for trustees to receive quotations from insurers. It can also affect the ability of an insurer to issue a formal quotation if, for example, some data items such as postcodes are incomplete.
Moreover, if lack of data requires insurers to make assumptions on data and/ or benefits, which may differ across providers, comparing quotations can be a near impossible task. An insurer may also add a risk premium to the quotation to account for the potential additional costs resulting from poor data.
Data cleansing is, therefore, crucial to ensure that trustees can run a competitive quotation process. However, the benefits of data cleansing should be weighed against the cost of delaying de-risking activities.
1.4. Investment strategy review
In a phased approach to de-risking, an investment strategy review is typically one of the first steps taken by pension schemes. When reviewing investment strategy the scheme needs to balance the long term investment strategy vs. potential shorter term transactional requirements. For instance, obtaining advice on portfolio structures that can more easily be transferred to an insurer prior to a Buy-in or Buyout may be valuable. Investment consultants can assist schemes to put in place an investment strategy that helps to ensure that scheme assets are structured to closely mirror Buyout pricing, for example by moving to less risky investments. This way of de-risking would stabilise the funding level and also assist with an in-specie asset transfer as part of a partial or full payment of the agreed premium for risk transfer. This can potentially reduce the net cost of Buy-in or Buyout.
1.5. Legal considerations
A trustee’s role is to act prudently and responsibly whilst operating the scheme in accordance with the scheme rules. Trustees must at all times ensure they look after the best interests of their members. While there are many areas of consideration, ultimately the role comes down to protecting the benefit promises made to the scheme beneficiaries. That is why it is important that the trustees are knowledgeable about all the features outlined in their scheme’s documents.
Before Buy-in or Buyout, the trustees should be able to demonstrate that they have the power to complete the transaction and take legal advice on any restrictions under the Trust Deed and rules of the scheme or under pension legislation.
The trustees should also review the specific benefits that are to be secured. Where the benefit structure is complex, for example with different rates of annual pension increases due to changes over time, the trustees should determine if this contractual arrangement needs to be replicated or whether there are alternative solutions that could be considered.
“When reviewing
investment strategy
the scheme needs to
balance the long term
investment strategy
vs. potential shorter
term transactional
requirements.”
Trustees should note that the current uncertainty surrounding the Government’s change in policy on the inflation measure from RPI to CPI will have some impact on investment strategy and de-risking. While RPI hedging is commonplace, there is no market yet in CPI linked instruments. In the meantime, trustees may wish to ensure that Buy-in contracts entered into have the flexibility to be restructured for CPI in future and any cost savings returned to the policyholder. The DWP issued a Consultation document on the change from RPI to CPI in December 2010, so there is less uncertainty now than there was, but still trustees will have to await final legislation before definitive answers can be given.
It is particularly important to consider benefit features which are specifically at the trustees’ discretion. The insurer will not usually take on any discretionary powers so a decision is needed as to whether to secure the discretionary benefits as an entitlement (for example paid for in the premium) or to stop the discretionary benefit entirely. Ideally, the approach to discretionary decisions should be
determined at the start of the Buy-in/Buyout process with details of these features to be agreed as early as possible during the set-up phase and then accurately implemented in a timely fashion.
The trustees will also need to consider whether there are any aspects of their pension scheme or de-risking activity that would necessitate special requirements.
For instance, in the case of a Buy-in, although insurers are required by regulation to hold prudent reserves and additional capital to back their guarantees, the scheme may desire additional security where significant liabilities are secured under a stand-alone insurance policy. (See section 4.3 for further discussion of collateralisation.) Where a Buyout relates to only one particular subset of the scheme (partial Buyout), trustees will need to consider the impact this may have on remaining members who will not transfer to the insurer. Two main points should be considered here:
•Protection offered by the insurer will usually provide more security vs. protection offered by the residual assets left in the trust.
•Cost of securing the insurance may outstrip the relevant member’s fair share of the assets of the scheme.
One way to address this perceived inequity is to establish that there is a sufficiently strong employer to back the remaining pension promise, as well as asking the employer to pay part of the premium so that only a fair share of the scheme’s assets are used.
In the event of a weak employer covenant, it is important to ensure that non-insured members do not lose out.
1.6. Feasibility
Buyout exercises can be derailed because of failure to set out a process and lack of understanding. A feasibility study at the outset helps to ensure that valuable time and resources are not wasted. Establishing that buyout is the right solution and understanding how the process will run leads to no surprises and gives greater confidence in the decision to proceed. Trustees will usually engage an adviser with the necessary skills and experience to help with feasibility. Having completed a feasibility study, trustees will find insurers more willing to be involved in the quotation process.
It is important that the trustees consider the pros and cons of the de-risking options available so that the decision to buy out is right for the scheme and, once made, focus can be on getting the right deal at the right time. There are several variations of buyout solution and trustees should work with their adviser to explore options to fit objectives and budget. Feasibility provides the opportunity to design and “test” a solution and ensure the support of all stakeholders before incurring significant expense.
Finally, a feasibility study allows trustees to consider their budget for the Buyout exercise, including adviser costs and management time, as well as the potential premium for the policy. This means trustees can fairly accurately assess the affordability of buyout and structure the exercise to suit the size and financial circumstances of the scheme and will be in a position to make a decision in principle to proceed with Buyout.
“Feasibility provides the
opportunity to design
and “test” a solution
and ensure the support
of all stakeholders
before incurring
significant expense.”
2. Approach
• Once the decision in principle is made to proceed with buyout, the trustees should agree the approach they will take.
• Trustees should also set out the objective criteria on which they will base their decision on the preferred provider.
• Trustees should take advice on the current state of the market and the providers, and consider which insurers are likely to have the capacity and expertise to deliver the best solution when needed.
• A budget for the exercise should be set out and monitored. This should include the time expected of trustees and scheme advisers as well as the likely overall time to conclude a deal.
• Roles and responsibilities should also be set out including, for example, who can make decisions and how the final decision on preferred provider will be made.
Once affordability has been determined and a decision in principle is made to proceed with buyout, the trustees should agree the approach they will take. This will include whether a full market review will be needed or if a more focused exercise is appropriate to the circumstances. For example, will there be an auction approach based on an initial level playing field for all providers or will trustees seek a bespoke solution to fit their needs? In the latter, a smaller number of providers will be involved and perhaps only one for an innovative solution.
Trustees should also set out the criteria on which they will base their decision on preferred provider, as this ensures the exercise remains focused on factors important to the stakeholders and the exercise will be more efficient and robust. It is important than these factors are adequately considered in advance to ensure that the questions asked of providers are appropriate from the outset. It is also helpful to ensure providers are aware of the important factors in the selection and that the criteria do not change as the exercise proceeds. The most common criteria for selection are:
• Price
• Structure of offer
• Ability and flexibility to deal with scheme benefits • Financial security of provider
• Flexibility and efficiency in asset transfer • Execution and transition capability • Service to members
• Administration capability and track record • Contract/policy conditions
Some criteria may be more important than others, for example, price may be by far the most important and trustees may wish to weight factors accordingly.
In this planning stage, the trustees should take advice on the current state of the market and the providers, and consider which insurers are likely to have the capacity and expertise to deliver the best solution when needed.
The likely timescales should be set out, especially where timing will impact on asset valuations, annuity pricing and resource availability. It is important that the subcommittee is able to demonstrate to insurers that a structured timetable is in place for the process. This allows insurers to plan resource appropriately and shows that the trustees are seriously considering de-risking.
Wherever possible, timing should be set to take account of major scheme exercises like a valuation or change of advisers or suppliers. The buyout adviser can help with project planning and management, unless one of the trustees has particular expertise.
As it is very easy to spend a lot of valuable scheme monies on large exercises, a realistic budget for the exercise should be set, agreed by all and monitored by the trustees. This should include the time expected of trustees and scheme advisers as well as the likely overall time to conclude a deal.
Roles and responsibilities should also be set out, for example, who can make decisions and how will the final decision on preferred provider be made? If a full trustee meeting will be needed, it should be arranged well in advance.
3. Request for Proposal
• Once the approach has been decided, the next step is to prepare a request for a bespoke proposal. Typically you might approach 3 to 5 insurers at this stage for an initial quote.
• Details of the data needed by the insurers can be found at
http://www.abi.org.uk/Publications/ABI_Publications_Defined_Benefit_ Pensions_and_Insurance_Data_Requirements_a83.aspx
• Quotations will be more easily comparable if the data provided is as complete as possible and all insurers are asked to use the same key dates and assumptions in their calculations.
• Complex benefit requirements can be simplified at this stage, though you would want to check that each insurer could cater for the more complex benefit structure if they were successful.
• Typically the timescale for an initial quotation is 3-4 weeks, with a more accurate quotation taking up to 8 weeks.
The next step is to commence work to prepare a request for a proposal or
quotation. It would be typical to approach 3 to 5 insurers at the initial quote stage. The insurer will require information and scheme data in order to produce the quotation as, even at this stage, the quotation is bespoke to the scheme. These requirements can be lengthy and complex and are comprehensively covered in the ABI Defined Benefit Pensions and Insurance: Data Requirements document: http://www.abi.org.uk/Publications/ABI_Publications_Defined_Benefit_Pensions_ and_Insurance_Data_Requirements_a83.aspx
If information provided is incomplete or unclear, insurers may make their own assumptions and quotations may, therefore, not be consistent between insurers. A good way of minimising the risk of each insurer making different assumptions is to record and circulate to every insurer any updates or amendments to the original information/specification provided. This should ensure that each insurer has a consistent set of information to use. Trustees should ensure that Data Protection Act 1998 requirements are covered when using identifiable member data for quotations.
To help compare like for like, all insurers being asked to quote should be asked to use the same key dates in their calculations (e.g. market conditions date, premium payment date, risk transfer date). It is also good practice to specify any key assumptions you want them to make on missing data elements.
One way to ensure consistent benefit modelling between insurers is to require that each insurer submit a quote based on prescribed assumptions, as agreed by the subcommittee. Any differences between the quotes on the prescribed assumptions might indicate differences in interpretation of scheme benefits and can be used to re-scale actual quotations in order to allow for a consistent comparison.
Trustees could simplify some of the more complex benefit requirements at the initial quote stage and advisers will be best placed to help with this. However, the benefit consultant would still need to check that the insurers could cater for the more complex benefit structure if they were to successfully complete the deal. Typically, the timescale for an initial quotation is 3-4 weeks with a more accurate quotation taking up to 8 weeks.
There will be a limited number of insurers who are willing to provide a quote at any one time. Each insurer’s interest and capacity to quote will vary in line with its own business goals and objectives, the availability of capital and the appetite of any insurer to utilise this capital to back annuity business as well as resource limitations and importantly the quality of the data and benefit specification provided. Also, the more confidence the trustees can give to the insurers that the exercise is a serious investigation the more likely the insurer would be prepared to produce a quotation. This can be demonstrated by means of a defined plan, timetable and decision making process for the investigation and confirmation of sufficient assets to meet the anticipated costs of the exercise. Only a small number of insurers will be prepared to quote for quotations below £10 million because of the expense of producing figures. A typical process would be to:
a. Seek initial quotations (potentially indicative on grouped data) to determine the affordability of the exercise. Complex benefit structures could be
simplified at this stage. Typically between 3 and 5 insurers are asked to quote.
b. Determine whether the exercise is affordable and worth investigating further based on the quotations received. If so, move to a second round of full quotations based on individual data provided to a list of insurers. It is crucial to provide a full specification and to circulate to all insurers any subsequent amendments or updates.
http://www.abi.org.uk/Publications/ABI_Publications_Defined_Benefit_Pensions_ and_Insurance_Data_Requirements_a83.aspx
c. Compare the quotations received and draw up a shortlist of insurers to proceed with further. Criteria for selection could include – price, ability and flexibility to deal with scheme benefits, ability to customise the solution to meet employer or trustee needs, financial security of insurer, flexibility and efficiency in asset transfer, administration capability and record, etc. It is good practice to inform insurers of the selection criteria in advance, this helps to ensure a more focused and appropriate response.
“Each insurer’s interest
and capacity to quote
will vary in line with
its own business goals
and objectives, the
availability of capital
and the appetite of any
insurer to utilise this
capital to back annuity
business as well as
resource limitations and
importantly the quality
of the data and benefit
specification provided.”
d. The scheme trustees should review their timetable, plan and overall strategy and confirm with the employer that the process continues to have the trustees’ support. It is helpful to inform insurers that the employer and trustees are in agreement of the strategy.
e. Trustees and their advisors should undertake a thorough and comprehensive review of the member data and benefit specification. Particular focus should be on any discretionary powers, benefits for children and dependants and guaranteed terms for member options within the scheme rules. Some scheme benefits may be uninsurable and these may need to be converted by the trustees into benefits that can be insured.
f. Completing the data review at this stage will minimise the possibility of future fluctuations to the price as a result of changes to data and specification emerging at a later stage. The process also gives confidence to the insurer that few changes are likely to emerge in future and thus reduces any uncertainty premium required. The timescales for such a review will vary depending on the size of the scheme, the record keeping of the administrators and the length of time since the last such review was carried out. It should be noted that changing membership data materially during a quotation process is a major issue for insurers, as it may impact their assessment of the scheme’s mortality. Trustees should therefore seek to avoid membership changes through data cleansing and preparation up front.
g. Ideally, at this stage the trustees would share initial asset information with the insurers so that any asset transition issues can be dealt with in good time. Sharing this information can allow transition planning to commence and possibly identify approaches that can reduce the expense of selling assets. Insurance policy terms should be reviewed and any open questions highlighted to avoid delay at the final stage. On receipt of the quotations the trustees would move to the final review stage (see Section 4).
Delays are sometimes unavoidable, but insurers are unlikely to be prepared to continually update quotations without a full understanding of the reasons for the delay, as well as an expected timetable to finalising the deal. In these circumstances it would be advisable to seek broad indicative updates so as to monitor the
4. Final Quotation
• Schemes should provide sufficient information and data to allow insurers to give accurate quotations.
• It is important at this stage to ensure that the key terms match between the trustees’ requirements and the potential insurer’s offering.
• Trustees may wish to consider a collateral arrangement. For short term Buy-ins leading to Buyout, collateralisation is rarely necessary but this option may be a more sensible consideration for long-term Buy-ins. However, it will add additional cost and overlap with protection mechanisms put into place under the current FSA regime, such as high levels of additional solvency capital that insurers are required to hold.
• It is important that trustees undertake due diligence checks on insurers to ensure that they have sufficient capital to write the business and withstand potential asset and liability shocks.
•Final selection of a provider should be based on all relevant factors, including: – Price
– Structure of offer
– Ability and flexibility to deal with scheme benefits – Financial security of provider
– Flexibility and efficiency in asset transfer – Execution and transition capability – Service to members
– Administration capability and record – Contract/policy condition review
• Once a decision has been made it is sensible to engage formally into a mutual exclusivity agreement to ensure that contracts and asset transfer arrangements can be finalised confidentially and tie in both parties’ commitment to the successful completion of the Buy-in/Buyout process.
4.1. Agreement on data and benefit specification
During previous rounds of quotations it is likely that questions will have been raised by the participating insurers on both the data and the benefit specification. In particular, scheme rules should clearly define the entitlements of any distinct groups of members, for example executive members, who may have different entitlements. The final specification sign off should be obtained from the scheme actuary, legal advisers and administrator.
For the data, the review should check that member numbers are correct, total pension amounts tally with those expected and revaluation and increase rates are correctly coded. All data should be up-to-date ensuring all increases to pensions are applied and member status correctly captured, for example deceased members should be removed and spouses established as appropriate.
A data verification exercise will follow and further data cleansing is to be expected as part of implementation. Premium adjustments (to be paid or rebated) in respect of these changes will become due but should not be significant as long as the more major issues are eliminated at the final quotation stage.
Quotations received from insurers should also be checked in order to ensure that these have been produced in line with the required specifications, or are very clear in what the price covers. The purpose here is to eliminate the risk of the scheme being asked to pay an additional premium at a later stage.
4.2. Contract/policy condition review
At the stage of gathering final quotations with a view to finalising the preferred insurer it is unlikely that detailed contract discussions will take place. However, it is important at this stage to ensure that the key terms match between the trustees’ requirements and the potential insurer’s offering.
4.2.1. Terms for member options
The most important member options are: • Cash Commutation at Retirement • Early Retirement
• Late Retirement • Transfers
The trustees will need to decide whether they want to adopt the insurer’s standard factors or retain the scheme factors or a hybrid of the two.
An insurance company’s own factors will need to demonstrate the FSA’s Treating Customers Fairly (TCF) outcomes. These factors may deliver a greater value of benefit than a scheme’s own factors as pension schemes have tended to base their factors on higher yielding investment approaches.
With legal advice, the trustees may choose to retain their existing scheme factors, in which case it is likely that the trustees can negotiate a lower premium from the insurers reflecting the lower cash flows being purchased.
“At the stage of gathering
final quotations with
a view to finalising the
preferred insurer it is
unlikely that detailed
contract discussions will
take place.”
4.2.2. Surrender terms for Buy-ins
Whether the policy is to be held as a long term Buy-in, or as a transition phase to Buyout, the trustees may seek to secure future surrender terms.
Insurers are generally reluctant to provide surrender terms but in some situations, for example on breach of solvency levels, a surrender of the policy may be triggered. However, this will have an impact on the insurer’s capital, asset management strategy and reserving, and trustees should expect to pay a premium for this option either explicitly at outset or as a deduction in the calculation of the surrender payment.
4.3. Collateralisation
Some trustees will wish to consider a collateral arrangement and insurers have developed structures designed to ensure that, under specified circumstances, the scheme is able to retake control of its assets rapidly and at a level that meets the pension liabilities. For short term Buy-ins leading to Buyout, collateralisation is rarely necessary.
This option may be a more sensible consideration for long-term Buy-ins, however, it will duplicate protection mechanisms put into place under the current FSA regime, such as the high levels of additional solvency capital that insurers are required to hold. Trustees should note that the Solvency II regime is likely to make structures that allow them to surrender the bulk policy more capital inefficient for insurers and hence more expensive.
Examples of collateral deals:
• Collateral – where additional funds are held to support the 10% liability not covered by the FSCS
• Ring fenced pool of assets – where the insurance assets supporting the scheme are held separately from the other assets of the insurance company. Under certain circumstances, for example insolvency, a charge can be crystallised and the assets can be recovered by the scheme.
• Other structures – for example deposit back where the scheme assets are paid across as part of the premium but they are then deposited back normally with a third party asset manager to manage as part of a standalone ring fenced fund. A collateral structure will cost more to reflect the additional costs of the
administration work and the impact of a potentially restricted future investment environment for the insurer. The Trustees need to understand whether this additional security is of value taking into account cost, effort, available security from the employer, the insurer’s reserve capital and the protection of the Financial Services Compensation Scheme which covers 90% of the insured benefits, leaving the employer with a residual risk of the remaining 10%. To date, no UK insurer has ever been unable to pay a contractual annuity payment.
4.4. Insurance company due diligence
It is important to ensure that the insurer has sufficient capital to write the business and withstand potential asset and liability shocks.
As all UK regulated insurers fall under the FSA regime, this due diligence is generally seen as confirmatory and performed upon the preferred insurer only during the closing stages of a transaction. In the unlikely event that a negative view of the insurer is formed, the trustees are still able to change their choice. The required depth of analysis is often perceived to be costly and therefore the approach of reviewing only the preferred insurer minimises costs.
In some cases, the trustees will review the strength of all relevant insurers, or a shortlist. In a minority of these cases, a comparison of financial strength will be drawn, although there is a danger that the comparison is spurious, distracting from the more important criteria of price and transaction structure.
Information supplied by the insurer may include accounts and FSA Returns. Trustees should consider appointing a specialist advisor to carry out this aspect of the due diligence due to the complexity of the information. This advice is normally valuable to the trustees although an understanding of FSA regulation is often most central in giving the trustees confidence in their chosen provider.
In particular, trustees should seek information from the insurer on their solvency level, capital coverage and the basis they use to calculate their reserves.
The External Credit Assessment Institutions (ECAI) can be a good place to start. They provide an independent opinion presented conveniently under the form of a standardised indicator. However, trustees should be cautious about any over reliance on ECAI’s ratings. It is imperative to always consider the most meaningful sources of information that will allow trustees to form their own opinion. The first step might be to look at the report issued by the ECAI explaining the rationale behind the rating. Trustees should always use several sources of information and apply a critical eye.
Another important set of metrics to consider is the regulatory capital requirements. Currently, UK insurers are subject to the Individual Capital Adequacy Standards (ICAS) framework used by the FSA. Insurers are making two separate calculations known as Pillar 11 and Pillar 22, to establish their minimum capital requirement.
Insurers must then hold assets in excess of the higher of these two calculations. In either case the due diligence review should look at the level of prudence embedded into the insurer’s reserving basis.
1 Pillar 1 is a prudent deterministic basis with a series of margins built in to provide additional coverage. 2 Pillar 2 looks to capture the true economic value of the assets and liabilities with specific additional allowances
From the 1st January 2013 the entire European insurance industry will be moving towards a new risk based and market consistent regime known as Solvency II. From that point in time the following key solvency indicators will be publicly available and published on a yearly basis through the Solvency and Financial Condition Report (SFCR). This report is the public disclosure which is expected to be made available via electronic publication. The SFCR will be required within either 3 or 4 months of an insurer’s financial year end. The SFCR must follow a prescribed structure that CEIOPS developed based on the Framework Directive. The areas covered in the SFCR are: Business and Performance, System of Governance, Risk Management, Regulatory Balance Sheet and Capital Management.
The key indicators are going to be the Minimum Capital Requirement (MCR) and the Solvency Capital Requirement (SCR). The MCR reflects an absolute minimum level of required capital below which supervisory action will automatically be triggered. The SCR represents additional capital for firms to hold in order to absorb significant unforeseen losses.
It is necessary to have a qualitative as well as a quantitative approach to the solvency assessment of insurers. Several elements should particularly be considered:
• What investment strategy is being followed and does the additional capital being held reflect the investment risk being taken?
• Demographic and longevity risks: How prudent is the basis being used, how does that compare to current thinking and what level of shocks can be withstood before solvency thresholds are breached?
• Level of expense reserves that are being held: Can the insurer realistically continue to operate effectively with the expense reserve that it is holding and again what level of increase in internal and third party costs can it withstand.
• Will the insurer continue to participate in the Buyout market into the future? Once the trustees are comforted that the insurer has sufficient reserves to meet its existing liabilities into the future, they should then consider future developments. Trustees should look at current business plans to assess the level of on-going investment into this sector by the insurer.
Any review should also look at the impact of events in the wider financial services sector, for example the introduction of reserving changes like Solvency II. Again, a major impact on an insurer’s balance sheet as a result of Solvency II may mean an exit from this sector and could lead to a breach of solvency thresholds.
The trustees should also consider off-balance sheet aspects when it comes to the choice of the preferred insurer and whilst this may seem to play little immediate significance it can actually add value to the overall Buyout/Buy-in process.
Key areas to review are:
• Robustness of controls, both financial and operational • Track record of paying pensions to members/policyholders. • Quality of service.
• Accessibility for members. Does the administration support multiple communication channels and mediums?
• Complaint history.
• Evidence of Treating Customers Fairly (TCF).
4.5. Final selection of provider
Following the review process, the trustees will need to make a decision. Using a matrix against the key selection criteria should allow forming a qualitative and objective decision. Typical selection criteria would include:
• Price.
• Structure of offer.
• Ability and flexibility to deal with scheme benefits. • Financial security of provider.
• Flexibility and efficiency in asset transfer. • Execution and transition capability. • Service to members.
• Administration capability and record. • Contract/policy condition review.
A scoring system may be applied where no clear-cut decision seems to be achievable.
It is important to make sure that all key stakeholders are involved at all times. Once a decision has been made it is sensible to engage formally into a mutual exclusivity agreement ensuring that contracts and asset transfer arrangements can be finalised confidentially. A mutual exclusivity agreement will also tie in both parties’ commitment to the successful completion of the Buy-in/Buyout process, but does not represent a guarantee of transacting.
“Once a decision
has been made it is
sensible to engage
formally into a mutual
exclusivity agreement
ensuring that contracts
and asset transfer
arrangements can be
finalised confidentially.”
5. Pre-Implementation
• Contract negotiations are a key part of the process. The terms of the policy documents will set out the rights and obligations of each party as regards the insured benefits and risks.
•Issues that may need to be considered are the extent of cover and liability, the price calculation, data verification, the insurer’s right to terminate or adjust cover, buy-in specific points such as data protection responsibilities and extension to other scheme members, premium payment by asset transfer and out-of-market risk (the risk of premium changes due to market movements and funds not being invested in a way which matches market movements). • Where a scheme’s assets are ones that the insurer would want to hold
against the liabilities, the out-of-market risk and the costs of liquidating a scheme’s investment portfolio can be reduced by paying all or part of the premium by a transfer of assets. This can also include hedges such as interest rate swaps.
• On a partial Buy-in or Buyout it is important to identify which assets will remain with the scheme and the appropriate investment strategy to support the remaining liabilities.
• Once trustees have decided to enter a Buy-in or Buyout transaction they should consider taking the follow steps to ensure the transaction can proceed smoothly and to timetable:
– finalise the transaction structure before beginning implementation. – arrange any additional funding required from the employer.
– put in place the plan for communications with member about the changes. – put in place the plan for approval and execution of documents including
any power of attorney needed.
– ensure the scheme’s fund managers have been given the necessary notice to disinvest or transfer assets.
5.1. Contract negotiations
Given the number of parties involved, negotiating and finalising the policy terms and related documents can take some time. The inclusion of extra features, such as additional security, is likely to increase the time needed for legal negotiations, as well as the associated advisory costs. Trustees should therefore consider carefully the additional value added by such features and use suitably experienced advisers to avoid excessive costs and delays.
Typically, the policy will be made up of a number of documents. The policy terms contain the detailed legal terms of the policy and set out the rights and obligations of each party. Whilst subject to negotiation, the policy terms are reasonably standard for each transaction and across insurers. Specific details for each
transaction are usually contained in the quotation (which contains the mechanism for calculating the premium) and the schedules attached to the quotation (which contain a detailed specification of the benefits to be provided and financial data relating to the benefits payable to each member covered under the policy). Both the insurer and the trustees will be looking to protect their respective positions in the policy. The insurer will be looking to ensure that it is taking on a defined risk only and will receive a specific premium in return for providing a specific set of insured benefits. Likewise, the trustees will be looking to ensure that the provider cannot avoid paying the insured benefits and that the premium to be paid and when is clearly set out.
Some key issues to consider in relation to the policy terms:
5.1.1. Cover and liability
It is crucial that the benefit specification and schedule of membership data are complete and accurate. These are the key documents to define which liabilities the insurer is taking on. Trustees often want their administrators and lawyers to review and approve the final versions of these schedules so time needs to be built into the process for this to happen. If insurers have raised questions about the benefits or member data during the quotation process, it is important that any uncertainties or remaining questions are cleared prior to the signing of the deal.
5.1.2. Price calculation
Having received a quotation, trustees may take some time to review and accept the terms and conditions laid out, with a further delay also likely before the final premium is calculated and paid. During that time, market conditions can change and, as a result, the policy will include provisions that allow the quotation price to be updated. It is important to understand the adjustment mechanisms and take advice on whether the scheme’s assets are invested in a way to closely track these adjustments.
“The insurer will be
looking to ensure
that it is taking on
a defined risk only
and will receive a
specific premium in
return for providing a
specific set of insured
benefits.”
5.1.3. Data verification
A quotation will be provided using the benefit specification and membership data provided by the trustees. However, that data can often be out of date or unreliable and in order to ensure that both parties secure the benefits they expect, it is usual to have a data verification process between the signing of the policy and the calculation of the final premium.
The policy terms will state how the data verification process will work, including any relevant timescales. This may require the trustees to provide information on the insured benefits, so that the insurer can review and confirm that it matches the original benefit specification provided by the trustees. Where it does not match the original specification, the policy terms will allow the insurer to adjust the premium as appropriate. The policy terms and the quotation will also need to state how any adjustments to the premium are calculated.
5.1.4. Insurer’s rights to terminate or adjust cover
In the event of particular circumstances – which are clearly set out in the body of the policy – the insurer will have the right to either terminate the policy or adjust its liabilities/premium(s) payable by the trustees. Such circumstances might include: • Significant changes to the insured benefits following data verification. • Significant changes to the membership data following data verification.
• Material changes in market conditions between the date of the quotation and the payment of the premium (or final premium).
• Specific changes in the law (for example, any future obligation imposed on the insurer to equalise Guaranteed Minimum Pensions) – (see Section 7, Other Considerations); or
• Other intervening events which have not been taken into account when setting the premium.
5.1.5. Issues relating to Buy-in
Buy-in Policies are often very similar to the documents used for a Buyout, however, some additional issues should be considered.
Under a Buy-in transaction, the scheme remains liable to the members and the trustees will remain the “data controllers” of membership data under the Data Protection Act 1998. It is therefore in trustees’ interest to ensure that the policy documentation protects their position as data controllers and that the chosen insurer has adequate data protection arrangements in place.
Where trustees are putting in place a Buy-in policy, they may want the policy to specify that it will move to Buyout at some point in the future, with members being issued with individual policies. The trustees may want to agree the terms of the individual policies and the insurer may want to be able to charge for issuing those policies.
Buy-ins will often target one particular group of a scheme’s total membership. However, as the scheme grows the trustees may want to include provisions that will allow them to add further members to the policy in the future. Terms and specifications for this would need to be set out in the policy terms.
The trustees may want to ensure that the Buy-in policy caters for the possibility of the scheme entering a PPF assessment period (see Section 7).
5.1.6. Premium payment
In order for the insurer to take over liability for the insured benefits as part of a Buy-in or Buyout, the trustees must pay the premium to the insurer.
The liabilities are assumed by the insurer on the date the premium is paid. However, in certain cases there may be an opportunity to transfer assets from the scheme to the insurer as part or full payment of the premium.
Provided the trustees put the appropriate measures in place at the preparation stage by working with the insurer and the scheme’s investment advisers, there should be no premium movement between signing the contract and paying the premium.
5.1.7. Out-of-market risk
‘Out-of-market’ risk defines the risk that money is not invested in the “right” financial market at a time when that market moves in value.
In the context of a Buy-in or Buyout, ‘out-of-market’ risk arises if the premium changes due to movements in financial markets and the funds being used to pay the premium are not invested in a way which matches those market movements. It is particularly relevant where assets held by the trustees need to be sold in order to pay the premium and there is a gap between selling the assets and paying the premium, during which the trustees are “out of the market”.
The trustees often have little control over this process. One approach of mitigating this risk is therefore to reduce or eliminate the time between contract signing and liability transfer.
However, the trustees still need to issue instructions to their fund manager to disinvest in the days prior to payment of the premium and, where there is no gap between signing the contract and transferring liability; these instructions may have to be given before final agreement is reached to proceed with the transaction. If the trustees choose not to issue instructions until the day on which contracts are signed and liabilities transferred, the assets may not be received until several days afterwards and, thus, exposing them to out-of-market risk.
To address this issue, it may be possible for the insurer to pre-invest their own assets on the condition that the trustees sign an agreement to pay the premium within a specified time-frame (normally between one and five days), providing evidence that disinvestment instructions have been delivered to their fund manager. With this approach, there is no ‘out-of-market’ period for the scheme. However, as there is a cost to the insurer in offering such facility, this may be factored into the premium calculation or charged as a separate cost to the trustees. It is also conceivable that a delay in receiving funds could be more than five days, potentially with a degree of uncertainty about timing. In cases where the majority of the premium is to be received immediately but the trustees can only commit to paying the remaining small balance over a longer time-frame, the insurer may be able to pre-fund this on the basis that interest would be charged on the outstanding amount. The interest charge is typically determined based on the length of the deferral period and the amount being pre-funded as a percentage of the total premium. Understandably, this solution is usually only available while the scheme is in the Buy-in phase, with the deferred premium being required to be paid in full prior to conversion to individual policies on Buyout.
5.2. Asset transition
Out-of-market risk can be significantly reduced if all or part of the premium is paid by a transfer of assets from the scheme to the insurer (in-specie transfer). However, for this to work, the assets offered by the scheme must be assets the insurer is willing to accept.
In order for the insurer to complete an assessment on which assets can be
transferred in specie, they will typically require information about the composition of the portfolio. The insurer will then work in partnership with the trustees, their fund manager, custodians and advisers to assist with a cash and/or asset transition strategy in a timely fashion.
In the case of a partial Buy-in or Buyout, it is equally important to identify in advance the assets that will remain with the scheme, and the appropriate investment strategy to support the remaining liabilities.
“The interest charge is
typically determined
based on the length of
the deferral period and
the amount being
pre-funded as a percentage
of the total premium.”
It is likely that the insurer will prefer to accept assets which it would look to hold, such as corporate or government bonds. The price for these may vary somewhere between the bid and offer prices available in the market being of benefit to both the pension scheme and the insurer. Assets which the insurer is less likely to hold may also be transferred, but usually at the price at which the insurer is able to immediately sell these onto the open market although other than administrative convenience, there is no value to transfer these second types of assets.
A mutually agreeable process would usually be devised to obtain prices on all assets. Large concentrations of a single name, sector or type of asset may require additional time to liquidate and this delay could increase the costs which the insurer will incur and will expect to pass on to the trustees. The expected cost can be estimated as part of the process. Using materially illiquid assets as part of an in-specie transfer will make agreeing the market value difficult and thereby slow up the process.
Many insurers are also likely to hold derivatives to hedge risks such as interest rate and inflation risk. If the transacting pension scheme has hedges, such as interest rate swaps, in their asset portfolio it may be possible to transfer (also known as ‘novate’) some or all of these to the insurer as part of the premium payment. Whilst it can be administratively burdensome for the parties involved, there can be financial savings and investment strategy reasons that make it worth the effort.
5.3. Preparing for the transaction
Once trustees have decided that they wish to enter into a Buy-in or Buyout transaction, there are a number of actions that they should consider taking to make the process more efficient.
5.3.1. Finalise transaction structure
During the tender process, trustees will often consider a number of different options in terms of which members and what benefits are to be covered, as well as how the premium is to be provided. Trustees need to make a final decision on these structural issues before they start the process of finalising and implementing the transaction.
5.3.2. Arranging additional funding
Additional funding from the employer is often required before the transaction can go ahead. Whilst all parties may be fully aware of this fact, it is important to ensure that the money from the employer is available when needed especially with regard to market movements.
5.3.3. Member communications
It is important that trustees, together with their consultants and any other parties involved, plan their communication strategy and timetable in advance and draft the relevant communications accordingly. Member communications are a legal requirement as part of a Buyout but may also be required as an essential part of any Buy-in process.
5.3.4. Approval and execution of documents
There is often very little time between finalising the policy terms and wanting to proceed with the transaction. Any delay at this point could put the whole transaction at risk of exposure to adverse movements in financial markets. In order to proceed quickly, the key players should be ensured for the key periods. This can be achieved by putting in place a “power of attorney” to enable the signing on behalf of a trustee if that particular trustee is unavailable at the crucial time.
5.3.5. Notice to fund managers
The transition of scheme investments is further outlined below. However, one step to remember as the transaction gets close to signing is to ensure that the scheme’s fund managers have been given any necessary notices to enable the scheme to disinvest or transfer assets to pay the premium.
6. Implementation
• Payment of the premium will trigger the start of the implementation stage. The extent of the work that needs to be done will depend on the size and scope of the transaction and, importantly, whether it is a Buy-in or Buyout. •For a Buy-in, particularly where the administration remains with the trustees,
the implementation is usually briefer than for a Buyout.
• The major issue to finalise is the data for the members included in the transaction. It is usual for data used for the quotation to have become out of date due to normal changes over time with any scheme.
•Therefore data will need to be fully updated and cleansed over time. The time required to do this should not be underestimated and data verification should start as early as possible, in the pre-implementation phase is possible. • Benefits that are not covered, or were simplified at the quotation stage, will
need to be confirmed and priced with the insurer.
• The insurer will need to maintain an up to date version of the insured member data and whichever mechanism is adopted, data transfer from the trustees to the insurer needs to be secure and comply with all Data Protection Act 1998 principles.
• When determining the final premium the insurer should set out in
reasonable detail the price movements between the final quotation and the final premium. How any surplus or shortfall should be dealt with should be set out by the trustees who should take legal advice.
• Policies will need to be finalised and issued once all benefits have been defined and assets transferred. For a Buyout the issue of policies to members will transfer the liabilities from the trustees to the insurer.
Payment of sufficient premium (in cash or in-specie assets) to secure the terms of the transaction triggers the start of the implementation stage. It is during this stage that all outstanding details need to be resolved – such that the final documentation, final price and any administrative considerations can be finalised. The number and the extent of tasks that need to be completed during this phase vary considerably depending on the size and scope of the transaction and, importantly, by whether the transaction is a Buyout or a Buy-in.
