Out-Law Analysis 3 min. read
03 May 2023, 2:48 pm
It is common practice for trustees to seek commitments from insurers about the extent to which they can accommodate core legal and commercial terms before exclusivity over the transaction is granted.
Trustees have looked at insurers’ ‘requested contractual terms’ (RCTs) responses as a means of differentiating between similar proposals and selecting a preferred insurer.
The case for RCTs is strong. In a very busy market, trustees are aware that they have more leverage to secure favourable terms via the RCT process before they proceed to exclusivity with an insurer. There are also the specific circumstances of the scheme to consider. As more and more schemes are planning to move quickly from full buy-in to buy-out, it is more important than ever that buy-in terms are sufficiently flexible and fit for purpose. This is so trustees can efficiently navigate things like GMP equalisation and dealing with tax issues on switching to buy-out.
The employer lens is increasingly relevant to RCTs as well. For example, employers will often be keen to understand things like the extent to which the buy-in policy will force trustees to make recoveries under employer indemnities to settle amounts owing to the insurer following a trustee breach.
There are various ways of running an RCT process. Many employee benefit consultants (EBCs) and law firms have their own standard list of RCTs and this can be an efficient way of assessing how different insurers measure up. However, in recent transactions, we found it beneficial to prepare a more bespoke shortlist of RCTs, tailored to take account of the strengths and weaknesses of each preferred insurers’ standards terms. Although this requires some additional legal work upfront, there are several benefits to this approach:
In a busy market where insurers’ standard terms are increasingly reasonable and already cover many common RCT points, trustees will want to consider whether the bespoke approach is right for them.
On one project we worked on, there was an extensive bespoke RCT phase that involved reviewing RCTs of six different insurers in parallel. This review was conducted over two stages, the second stage involving an interaction with the insurers to negotiate improved RCT positions. One insurer refused to engage during the first round but still proceeded to the second round purely due to pricing.
This example raises the question of whether there is much to be gained in the bespoke approach. Phasing the RCTs over two stages in this way involved a lot of work. Perhaps a more comprehensive but generic RCTs process would have been more effective, particularly given that core legal points and detail will still require negotiation once a preferred insurer has been selected.