Discharging your legacy annuities – trickier than you might think?

These days defined benefit schemes buy annuities as part of a bulk exercise to manage liabilities and ultimately wind-up the scheme. However, in the past many schemes bought annuities in the name of the trustee with different insurers as and when people retired.

As a result, many trustees are holding a mixed bag of legacy annuities of different vintages with different insurers. Some may have been purchased directly by the scheme, whilst others could have been inherited from previous mergers or transfers in.

These annuities have probably sat quietly in the background for many years. However, they will need to be dusted-off and discharged before you can wind-up the scheme.

Sounds like a quick and easy job? Think again. You may find that getting rid of your legacy annuities could be more complicated, costly and time consuming than you’d expect.

So what challenges might you face?

Some of the challenges you could face might include –

• Changes of ownership – The scheme which originally bought the annuity may have changed name, merged into another scheme and/or been wound up. There could also have been changes of trustee over the years. If insurers have not been kept fully updated, you may have to track back through the scheme history to clarify the current position.
• Missing information – Some schemes may have only kept limited information when the annuity was bought. Others may have lost information over the years (e.g as a result of changes in provider or the annuities being inherited as part of a transfer). As a result, there may be material gaps in the information held about the annuities and the individuals they relate to.
• Insurer processes – Each insurer will have its own processes and limits on what they can/will accommodate. This means that trustees may not be able to follow their preferred process or apply a single approach across multiple insurers. Many insurers also now only have very limited resource dedicated to managing queries in relation to legacy annuities so response times can be slow.
• Potentially vulnerable individuals – The individuals the annuities relate to could be very old or potentially vulnerable. If they are paid directly by the insurer, the trustee may not have had any direct contact with them for a long time. Trustees should think carefully about how best to communicate with these individuals and minimise the impact on them to avoid any unnecessary concern.
• Benefit mismatches – Some annuities will fully match the individual’s entitlement but others might not. If an annuity only secures part of an individual’s benefits, the trustee will need to address the gap so the full benefit entitlement can be discharged. If the individual has any GMP, a mismatch between their entitlement and what has been secured under the annuity could also arise as a result of the requirement to equalise benefits for the effect of GMPs.

What can you do to help?

Put legacy annuities on the agenda

Trustees should look at legacy annuities at an early stage, or even in advance, of any project to start securing benefits outside of the scheme and/or preparing for wind-up. This will allow them to be properly factored into their plans and taken account of in the project’s budget, resourcing and timeline.

It’s important to bear in mind that although many legacy annuities can be discharged by simply assigning them into the individuals’ names once a scheme has entered wind-up, this may not necessarily be the most appropriate approach in all cases. In some cases, trustees may want (or need) to consider other options, particularly if there is a benefit mismatch.

The sooner trustees think about their legacy annuities, the more options they are likely to have and the less likely it is that their plans could be delayed or blown off-course by some old annuities.

Do a stock take

Trustees should work with their administrators to build a clear picture of all the legacy annuities they hold so they know what they are dealing with.

As part of their stock take, they should be asking questions such as –

• Which insurer(s) are they with?
• Are they individual or group policies?
• Which individuals do they relate to?
• What information do they hold about the annuities and the individuals?
• Are the secured benefits a full match to the individuals’ entitlement?
• Do they hold copies of any of the policy documentation?

Take advice

This is an area where there can be a range of legal risks and requirements which need to be addressed to ensure the trustees have properly discharged their liabilities. However, it is also an area where trustees may find that they have to be fairly flexible and pragmatic (for example, to work around gaps in available information or a particular insurer’s approach).

As this balancing exercise can be tricky, trustees should work closely with their advisers to ensure that they have properly considered their options and their approach is reasonable in their scheme’s circumstances.

They should also keep a record of the steps they have taken to discharge their legacy annuities, and why, just in case this needs to be explained later.

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