HEALTH WEALTH CAREER UK DB BULK PENSIONS INSURANCE

MARKET REVIEW MARCH 2016 UK BULK PENSIONS INSURANCE

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CONTENTS

01 02 03

FOREWORD: A £12 BILLION MARKET — MERCER PENSION RISK WELCOME TO THE MOVING FROM STRENGTH EXCHANGE® - CREATING A FIRST EDITION TO STRENGTH CLEAR LINE OF SIGHT TO A POTENTIAL “END GAME”

04 05 06

A REVOLUTION IN THE THE ART OF ASSESSING ALIGNING INVESTMENTS AS SETTLEMENT OF LARGE YOUR SCHEME’S LONGEVITY PART OF A BULK ANNUITY PENSION LIABILITIES RISK AND DECIDING TRANSACTION WHETHER TO BUY PROTECTION

07 08 09

WHY ARE INCREASING WILL INSURERS STAND THE LIST OF BULK ANNUITY NUMBERS OF SCHEMES TEST OF TIME? AND LONGEVITY SWAP CARRYING OUT A TRANSACTIONS PENSIONER BUY-IN?

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01. FOREWORD

David Ellis Mercer UK Leader, Bulk Pensions Insurance Advisory

WELCOME TO THE FIRST EDITION OF UK DB BULK PENSIONS INSURANCE — MARKET REVIEW.

We’ve sought to keep you up to date on the latest developments in the UK bulk pensions insurance market relevant to defined benefit (DB) pension plans. Keeping in touch in this fast-evolving and growing marketplace is now demonstrably beneficial for all stakeholders. The range of choice and the commercial environment mean it is easy to pay more than necessary and still not purchase the best product for your scheme. Bulk pensions insurance policies tend to be irreversible and decisions made, or not made, could impact significantly on the sponsoring employer’s finances and the long-term outcomes of scheme members.

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Many sponsoring employers and Substantial evidence supports this Mercer’s Bulk Pensions Insurance trustees are aiming to move their UK trend, with a steadily increasing Advisory group has led on more pension obligations to an insurer by volume of deals transacted in than £17.5 billion of UK buy-in and purchasing a bulk annuity. For this recent years despite low yields in buyout transactions, more than reason, the UK bulk pensions financial markets. In many cases, it any other advisor, including all five insurance market is likely to increase is now demonstrably achievable to buyouts in the UK involving a premium in size over time. Over the last re-engineer the finances of plans above £1 billion. The core broking 25 years, approximately £80 billion in of all sizes to support the outcome team, numbering 22 individuals with DB obligations have been transferred the sponsoring employer is seeking, 200 years of combined experience, to insurers, but this will be dwarfed with the full support of trustees. partners with others at Mercer and by transaction volumes expected The economic, legal, governance, its sister companies, Marsh and Oliver in the next 20 years as it becomes and administration aspects can be Wyman, to offer a genuine one-stop increasingly attractive to make coordinated to make a transaction shop for all advisory and transactional such transactions: work for all stakeholders. services in relation to pension buy- ins, buyouts, and wind-ups. • The natural passage of time makes • Plans of all sizes can be DB pension obligations more transformed, sometimes in short Asset movements to the end of certain due to reducing durations, periods (for example, less than February 2016 have been harsh for making them easier and cheaper to a year). a lot of schemes; nevertheless, the externalise via insurance or lump continuing volatility, further fuelled sum payments to individuals. • Win-win-win scenarios are by the Brexit political debate, has achievable for the sponsor the potential to create significant • For most sponsoring employers, employer (by removing obligations), pricing opportunities for those these same obligations are also the trustee (by settling member who are out-at-market and able to becoming legacy in nature as benefits), and members (by offering transact quickly as and when the employees move on or retire, them benefits options). time is right. Mercer Pension Risk making the decision to move away Exchange® — see Article 03 — allows from sponsorship easier. • The true financial position isn’t set buyers and sellers of bulk annuities to in stone, and can be substantially come together to monitor prices and • The recent and ongoing sea change different (in a beneficial way) from rapidly transact, a way of interacting in pension flexibility promoted desktop estimates. not seen before, as recognised by by the current UK government is the Pensions Age “Innovation Award permitting individuals access to of the Year” 2016. their benefits, previously locked into the pension system, in ways never seen before.

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0 2 . A £12 BILLION MARKET — MOVING FROM STRENGTH TO STRENGTH

Against the challenging backdrop of volatile markets, persistent scheme deficits, and low inflation/gilt yields, and alongside significant pensions-related distractions (trustees and sponsors embracing “Freedom and Choice” and insurers getting ready to implement their new regulatory capital regime under Solvency II), the bulk annuity market remained extremely buoyant during 2015, with approximately Martyn Phillips £12 billion of bulk annuities purchased, the Bulk Pensions Insurance Advisory second-highest annual amount of pensions risk ever transferred to insurers. This clearly demonstrated that effectively and economically transferring pension risks to insurers is a thriving marketplace that can only be set to grow.

MARKET SHARE 2008-2014 MARKET SHARE 2015

Scottish Widows 1% 9% 3% 8% Rothesay Life 23% 2% 10% 19% Prudential

Pension Insurance Corporation 16%

Legal & General 10% 30%

Just Retirement / Partnership 12%

Aviva

25%31% AEGON

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BULK ANNUITY BUSINESS VOLUMES

15 250

12 200

9 150

6 100

3 50

0 0 2008 2009 2010 2011 2012 2013 2 014 2015

DEALS OVER £500M £BN PREMIUM VOLUME £BN

DEALS UNDER £500M £BN NUMBER OF TRANSACTIONS

The largest deal of 2015 was the £2.4 billion buyout Overall, the outlook for 2016 is that the bulk annuity by Philips, insured with Pension Insurance Corporation market remains good to go, with existing insurers (PIC) in November. Alongside this trade was more than continuing to commit to the market, plus some new £1.1 billion of the same scheme converted during the year entrants during 2015 and beyond keen to establish from buy-in to buyout with Rothesay Life and Prudential. themselves within this growing marketplace: Scottish The Philips transaction (like the TRW transaction in Widows wrote £400 million of business during 2015; 2014 that was placed with Legal & General) emphasises Canada Life traded their first deal, albeit a more the ability to financially re-engineer pension schemes, modest £5 million. creating value via a coordinated and combined package that allows members to take valuable options, supported 2015 saw the continuing and growing use of medical with high-quality financial advice, against a background underwriting to broaden the range of solutions being of annuitisation. This kind of joined-up project delivers adopted to de-risk pension schemes. Of particular note improved value for individual members and can enable was the growing use of “top slicing” deal structures, economic settlement of pension liabilities at well below whereby risks concentrated within the small number what was perceived to be the realistic buyout cost. of largest liabilities among the pensions in payment are subject to a medically underwritten buy-in. Often, the Despite the headwind of low-yield and volatile markets, largest 10% of pensions in payment can account for insurer pricing remained attractive over 2015, with notable 25% or more of total pensioner liabilities. Essentially, aggressive pricing seen at the £100 million pensioner-size medical underwriting seeks to gain a more granular transaction level, where pricing remains significantly lower understanding of longevity risk among underwritten than the cost of backing those same liabilities using gilts. liabilities by gathering health and lifestyle information. Improved pricing can thus potentially be achieved by Looking forward, early evidence indicates that Solvency II removing margins for prudence for any uncertainty over has left pricing in 2016 for pensions in payment relatively the potential life expectancy of individuals with such unaltered compared to 2015 prices, but with perhaps a large pensions. modest increase in deferred member pricing. Insurers are tending to purchase more mortality reinsurance as they adapt to the new regime.

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03. MERCER PENSION RISK EXCHANGE® - CREATING A CLEAR LINE OF SIGHT TO A POTENTIAL “END GAME”

Stephen Purves Bulk Pensions Insurance Advisory

Would it be helpful to have robust, monthly information on your DB pension schemes’ true finances — and to understand how these are developing over time?

Improved information becomes more critical when a buy-in approach with either just one insurer or a small group of or buyout is being considered, as sponsoring employers insurers. This approach isn’t easy to maintain for lengthy and trustees need to know they’re doing the right thing periods and may inadvertently omit insurers that could at the right time in managing their pension obligations and have offered the best pricing at that time. need to know the commercial insurance pricing for their own pension plans at all times, enabling them to take any Mercer Pension Risk Exchange® solves these problems opportunities that could arise. and, as a result, has won the Pensions Age “Innovation Award of the Year” 2016. It brings real clarity to the The UK pension buy-in and buyout market hasn’t always UK pension buy-in and buyout market by supporting a lived up to these ideals, and in many ways hasn’t operated two-way information flow between buyers and sellers of as efficiently as it could. Sometimes insurer pricing has bulk annuities and provides information everyone needs, been difficult to obtain quickly and cheaply, and obtaining instilling the confidence needed for decision-makers to regular insurer pricing has tended to require a bespoke act decisively when the time is right.

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“An impressive submission in a highly competitive category, this firm’s entry displayed true innovation with clear benefits for the pensions space.” — Pensions Age, 2016 (Innovation Award of the Year)

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PRICES OBTAINED VIA MERCER PENSION RISK EXCHANGE ARE ACTUAL INSURER PRICES

The Exchange provides pricing directly from the insurers on a regular basis — not pricing estimated by Mercer derived from broader insurer pricing information. This is real-life insurer pricing, not indicative pricing. It’s like receiving a range of formal bids from insurers each month, often starting years before pension plans are ready to transact.

Insurers’ pricing and terms are based on transaction-quality, detailed, plan-specific disclosures covering not only the plan’s benefits and individual member level data but also the plan’s wider commercial situation — the same information that is used when plans actually transact.

1. Mercer Pension Risk Exchange is a transparent, online platform bringing together buyers and sellers of pension buy-ins and buyouts. This facilitates the discovery of opportunities in a way never seen before.

2. The Exchange allows insurers to see your pension plan’s (anonymised) data directly and permits insurers to make exclusive proposals for buy-in or buyouts that you wouldn’t otherwise obtain; for example, if an insurer is temporarily able to offer improved pricing.

3. The Exchange assists in decision-making and facilitates the selection of optimal timing for a future buy-in or buyout, thereby improving outcomes.

4. All insurers active in the UK bulk annuity market support the Exchange, and it works for all deal sizes and deal types (buy-ins, buyouts, medically underwritten bulk annuities, etc.).

5. By producing plan-specific disclosures up front, it permits faster decision-making and eventual deal execution, allowing trustees and sponsors to take advantage of often fleeting windows of opportunity.

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TRADITIONAL APPROACH

Sponsoring employer Member Create Insurers’ initial Negotiated Deal agrees to fund buyout benefit/data plan-specific pricing obtained: price obtained: executed “for the right price” cleanse disclosures for price not right, deal identified insurers and so no deal request quotations

H IGH PRICE

PRICING OPPORTUNITY MISSED BY TRADITIONAL APPROACH LOW PRICE

Sponsoring Create Commence An insurer Pricing hits Target price Deal employer agrees plan-specific monitoring suggests ways to trigger to achieved executed to fund buyout at disclosures for phase via improve data to commence final a target price insurers and monthly pricing improve pricing negotiations upload to Exchange

MERCER PENSION RISK EXCHANGE®

“I think that this is a brilliant initiative. I would encourage sponsoring employers and trustees with a buy-in or buyout in their short- to medium-term plans to give this a very close listen.” — Steve Southern (Director), Steve Southern Trustees Limited.

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04. A REVOLUTION IN THE SETTLEMENT OF LARGE PENSION LIABILITIES ACHIEVING ACCOUNTING SETTLEMENT OF BILLIONS OF POUNDS OF PENSION LIABILITY, RAPIDLY AND AFFORDABLY

Harry Harper Bulk Pensions Insurance Advisory

Over the last two years, a breakthrough has occurred in the pace and method by which large pension liabilities can be economically settled. The Philips transaction (£2.4 billion of pension liability that was bought out during 2015, plus a further £1.1 billion that was converted from buy-in to buyout during 2015) represents a landmark de-risking and buyout transaction that follows closely on the heels of the TRW transaction (£2.5 billion in 2014). Both of these Mercer-brokered transactions combined several projects run in parallel to settle huge amounts of pension liabilities, in projects lasting 12 months or less from project inception to accounting settlement and buyout.

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A genuine win-win for scheme members and the sponsor:

• Highly valued options were given to members that would not otherwise be available.

• Full personalised financial advice was provided to members.

• The security of an annuity was provided for those members who did not prefer other options.

Both of these sponsor-led projects (fully supported by the trustees) demonstrate how it’s possible to overcome all legal, administrative, and financial obstacles to buyout pension liabilities and offer financial advice and member options (to tens of thousands of members) in parallel. To achieve this over a short period of time requires a combination of bulk annuity broking experience, the ability to hedge investment risks throughout, and, not least, the ability to overcome administrative and data issues and to organise high-quality member-option programmes.

The end result is that the real economic cost of settling all scheme liabilities can be below any desktop actuarial estimate of buyout pricing.

P HILIPS OBJECTIVE: SETTLE LIABILITIES DURING 2015 FOR A GIVEN CAPITAL INJECTION

Deferred members ETV* (non-insured) WULS* PIC BUYOUT

+

PAY WULS/ Pensioners PIE* TCL SDB* OR ETV (non-insured) WULS/ + TCL SDB* Rothesay ROTHESAY AND b uy-in PRUDENTIAL BUYOUTS Prudential b uy-ins

STARTING POINTE9 MONTHS ND POINT

*ETV = Enhanced Transfer Values, WULS = Winding Up Lump Sums, PIE = Pension Increase Exchange, TCLSDB = Trivial Commutation Lump Sum Death Benefits

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05. THE ART OF ASSESSING YOUR SCHEME’S LONGEVITY RISK AND DECIDING WHETHER TO BUY PROTECTION

Phil Caine Demographics and longevity consultant, Bulk Pensions Insurance Advisory

None of us knows for sure how long people will be living in the very long term. Perhaps the significant improvements seen in the early 21st century are a sign of things to come, or maybe it will become harder to progress cures of more aggressive cancers and Alzheimer’s. This long-term uncertainty is the main reason to seek to de-risk longevity. In the absence of crystal balls, we need to do our best to understand where mortality rates will be in the more immediate future.

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In current financial markets, just one year of additional • Comparative mortality modelling for smaller schemes: life expectancy could cost a scheme in excess of 5% of firm, evidence-based assessment of longevity using their total liabilities. Annuities, both individual and bulk knowledge of similar individuals in other schemes. policies, have always provided a way to address longevity risk, with terms based on behind-the-scenes tailored • Bespoke mortality modelling for larger schemes where life expectancy estimates, and, in recent years, longevity a significant amount of longevity experience data is swaps and medical underwriting have emerged as new available: modelling techniques to assess scheme- ways to specifically insure or assess longevity risk. specific longevity experience without the constraints of “standard” tables. Greater volumes of experience data and improved computing power have led to a better understanding by • For those in the middle, with some degree of longevity insurers of annuitants’ life expectancies. However, pension experience data: “credibility-weighted” outcomes that schemes of all sizes already have enough data at their adjust “smaller scheme” studies to make appropriate disposal to use techniques similar to insurers in estimating allowance for the limited experience data held. the longevity of their members, enabling schemes to: Going through an exercise to assess a scheme’s longevity • Assess the reasonableness of longevity swap pricing. risk will help reduce future insurance premiums by being better informed in negotiations, demonstrating credibility • Assess the reasonableness of bulk annuity pricing. to insurers, and by highlighting in advance the scheme data areas that need correction or clarification. • Consider partial or total medical underwriting.

Mercer licences the same industry-leading and academically reviewed longevity analysis techniques as used by the majority of UK insurers, and we’re the only UK consultancy to do so. Having the right technology, together with our own pension scheme experience data collected for more than one million annuitants, plus extensive experience in advising on mortality assumptions for a wide range of clients, enables us to undertake:

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LONGEVITY SWAP TRANSACTIONS DURING 2014 AND 2015

PENSION SCHEME DATE £M REINSURER/COUNTERPARTY

Aviva Mar 2014 5,000 Munich Re/Scor/Swiss Re

BT Jul 2014 16,000 Prudential (USA)

Phoenix Group Aug 2014 900 Reinsurance Group of America

MNOPF Jan 2015 1,500 Pacific Life Re

ScottishPower Feb 2015 2,000 Deutsche Bank/Abbey Life

AXA Jul 2015 2,800 Reinsurance Group of America

Scottish & Newcastle Sep 2015 2,400 Friends Life (Aviva)/Swiss Re

RAC Nov 2015 600 Scor

Undisclosed Dec 2015 90 SmartDB (Mercer)/Zurich Assurance

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LARGE BULK ANNUITY (ABOVE THE LINE) AND LONGEVITY SWAPS (BELOW THE LINE) 2008–2015

3,000 ICI TRW 2,500 Philips 2,000 EMI TotalCAA 1,500

C&W Thorn GlaxoSmithKline T&N 1,000 Lehman Bros Rank Uniq MNOPF NCR ICI Ntn Bank 500 MNOPF Cadbury ICI ICI Undisclosed 0

-500 Bentley RAC Berkshire Pilkington LV= PGL -1,000 Carillion Babcock BA BA MNOPF -1,500 Akzo Nobel ITV BAe ScottishPower -2,000 RSA AstraZeneca Scotts & Newc -2,500 BMWRolls-Royce Axa -3,000 BAe AvivaBT 2008 2009 2010 2011 2012 2013 2014 2015 2016

*The mortality swap transactions for BT, £16 billion, and Aviva, £5 billion, would be off the bottom of the table, so are instead shown just below the £3 billion line.

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06. ALIGNING INVESTMENTS AS PART OF A BULK ANNUITY TRANSACTION

Suthan Rajagopalan Financial Strategy Group

Negotiating a competitive bulk annuity quote through the brokerage exercise is only the first step towards successfully completing a trade. To secure the pricing basis and maintain affordability in a transparent manner, it’s important to develop a matching investment strategy early in the process prior to exclusivity being given to a single-lead insurer. Coordination of investment negotiations should therefore sit alongside insurer negotiation and selection discussions in order to deliver the most effective combined broking and investment solution, from both a cost and risk perspective.

The risk caused by investment mismatching versus insurer pricing can be far greater than the transaction costs, so should be given very significant focus. Successful experience of bulk annuity investment matching strategies and asset transition are keys to a successful transaction.

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A well-developed premium payment strategy annuity policy upon completion or to hedge market risk should include: throughout the implementation period:

• A transparent price-tracking mechanism by which • Transitioning assets into those the insurer will accept changes in the insurer’s pricing can be directly justified can be used to progressively lock in the selected through observable market data. insurer’s price and cut transition costs materially.

• An investible model portfolio (preferably aligned with • Derivatives can be novated or transitioned more the above) that serves as a benchmark against which efficiently, minimising or removing the risk of moving hedging decisions can be assessed while also acting as market prices. a potential in-specie portfolio to minimise transaction costs upon asset transfer. • Insurer pricing can often be reduced, if the insurer knows it won’t be exposed to the risk of needing to • Regular pricing updates from the insurer. re-invest large amounts of assets during the days and weeks following a bulk annuity purchase. • The flexibility and stability necessary to support any member option exercises if these are being run as a part Schemes that have used successfully extensive pre- of the transaction. transition arrangements include many of the major buyouts over £1 billion, such as Philips, TRW, and T&N. The scheme’s investment strategies can then be It’s also important to have experience of extracting restructured in light of the price-tracking framework tranches of assets from within pooled funds, which agreed with the insurer that is granted exclusivity, so that increases the accessibility of price-tracking portfolios. assets are either suitable to directly purchase the bulk

MERCER BUYOUT AND INVESTMENT ADVICE

Assets progressively traded into insurer price-linked assets

Insurer non acceptable bonds

SCHEME’S COUNTERPARTY BOND LDI BANKS MARKET PORTFOLIO

Liability and Cash and currency acceptable hedging swaps bonds Cash and acceptable bonds

BULK ANNUITY PROVIDER

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07. WHY ARE INCREASING NUMBERS OF SCHEMES CARRYING OUT A PENSIONER BUY-IN?

Mike Franks Bulk Pensions Insurance Advisory

In exchange for the buy-in premium, the insurer will pay an income stream to the pension scheme that matches the payments made to the insured pensioners. After the transaction is completed, the pension scheme still has the same liabilities, but the funding risk in relation to the pensioners in payment has been removed.

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The popularity of pensioner buy-ins among trustees • Completing a pensioner buy-in doesn’t prevent the and scheme sponsors continues to grow as they look scheme’s deferred liabilities from being insured at a for the best ways to manage their long-term risks. later date. Bulk annuity transactions covering just the Here are some of the reasons pensioner buy-ins deferred members are very common. are currently thriving: • Going to market to obtain pricing in respect of • Pension schemes don’t have to be fully funded to carry pensioner liabilities on a standalone basis has never out a pensioner buy-in. Furthermore, most schemes been easier. As schemes look to better manage their don’t require a cash injection from the sponsor to ongoing funding risk, pensioner buy-ins will continue to transact. It’s common for a pensioner buy-in not to form a significant part of long-term de-risking strategies. give rise to a material strain relative to the full funding reserve that a typical pension scheme would hold for the pensioner liabilities. In fact, many schemes with conservative funding bases transact at prices below their full funding reserve.

• A pensioner buy-in can make the funding of the remaining liabilities easier to manage. Once the funding risk for the pensioner liabilities is removed, trustees and sponsors may be better placed to address the funding of the longer-duration deferred liabilities that remain uninsured.

• Carrying out a pensioner buy-in doesn’t mean the pensioners are being treated more favourably than the deferred members. A pensioner buy-in is held as an investment by the trustees and, consequently, if the pension scheme’s overall funding risk is improved, this benefits all scheme stakeholders.

• Volatility in financial markets hasn’t been a barrier, as the trustees and scheme sponsor are firmly in control of when the transaction takes place. After obtaining initial pricing from insurers, it’s possible to monitor the cost of a pensioner buy-in over an extended period and only proceed when the economics are right. Mercer has worked with many clients on this basis, and extracting this value from the market is a key feature of the Mercer Pension Risk Exchange ® platform (see Article 03).

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08. WILL INSURERS STAND THE TEST OF TIME?

Marc Loh Oliver Wyman

WHY FINANCIAL STRENGTH OF AN INSURER IS IMPORTANT

Selection of an insurer for bulk annuity or similar transactions is a complex process that typically encompasses three crucial factors: price, quality of administration, and financial strength. The latter is important since the trustees and the sponsoring employer must ensure that the chosen insurer has the long-term financial capability to meet the scheme’s liabilities, taking into account the very long-tailed nature of pension payments. Assessing financial strength requires a long-term view focusing not only on short-term issues such as the current solvency position, but also on risks that are more slow burn in nature such as trends in future mortality improvements.

Longevity risk is usually the largest risk factor faced by bulk annuity providers. We would look to the insurer to demonstrate it has sufficient capital and management capability to effectively manage and mitigate this risk. Credit risk on the underlying corporate bonds is another significant risk factor for insurers. With the risk of default in respect of one or more bonds, an assessment needs to be made of how well an insurer has allowed for and managed this. It’s also crucial to consider whether the provider has both the resources and the appetite to take on the risks inherent in a transfer for very large schemes. This is especially challenging for the newer entrants that specialise in bulk annuities, as they would be subject to a greater concentration of risk exposure than the traditional multiline insurers that are able to diversify their risks against other product lines written over many years.

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ANALYSING FINANCIAL • New business capacity — This is particularly relevant for STRENGTH the newer entrants to the market, since writing new business uses up free capital. There is therefore a limit Our approach and the analysis we carry out depend on on how many schemes an insurer can take on without the scope required by our clients at any particular time. unduly affecting its financial strength. We discuss any This, in turn, is often driven by the size of the transaction. capital-raising plans with the insurer’s management For small deals, we may carry out only high-level analyses team and reach a view on how much new business could on public data; whereas, for larger schemes, we go into be written before further capital needs to be injected. greater detail and focus on non-public information and arrange to meet members of the insurer’s management • Group structure of the insurer — We usually focus our team to discuss the latest financial position. We assess analysis on the operating entity writing the business. various financial strength and key performance indicators However, it’s sometimes important to consider the using a broad range of quantitative and qualitative capital position of wider group companies and the extra analyses, such as: strength or risks they bring.

• Regulatory solvency — We analyse the insurer’s • Expense ratios — Acquisition and maintenance regulatory returns together with report and accounts expense ratios indicate the efficiency of insurers, information, requesting up-to-date data as far as which, together with historical information and peer possible. We may also seek non-public data in order to comparisons, give useful information on how costs are gain insights into the risks the insurer faces and its risk managed. This can have an important effect on financial management capabilities. We examine trends in solvency strength over the longer term. over time and benchmark against peers in order to assess relative financial strength. • Financial implications of any options or guarantees — These exist in most insurers, and we examine their • Valuation basis — Assumptions underlying the solvency nature and how they’ve been allowed for in the calculation influence the result in an insurer just as insurer’s reserves. they do in a pension scheme. It’s therefore important to look at the main assumptions and to assess their appropriateness and how they compare with typical market practice.

• Investment strategy — Pensions are long-term financial obligations, and the structure of the investment portfolio the insurer uses to back its liabilities needs to be understood in terms of the level of risk it contains, how that risk has been allowed for, and how well matched it is to the nature of the liabilities.

• Free assets above statutory requirements — An insurer’s “spare cash” is an important factor when considering how the insurer would cope with shocks to its solvency.

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09.

LIST OF BULK ANNUITY AND LONGEVITY SWAP TRANSACTIONS

A. UK BULK ANNUITY TRANSACTIONS BY INSURER (£M)

Market share 2008- 2008 2009 2010 2011 2012 2013 2014 2015 (estimated) 2014/2015 only

Aegon 124 155 26 0 0 0 0 0 1%/0%

Aviva 881 176 873 1,076 188 379 874 984 9%/8%

Canada Life 0 1 1 7 1 0 0 32 0%/0%

Just Retirement 0 0 0 0 4 91 688 1,235 2%/10% & Partnership

Legal & General (L&G) 2,101 1,380 999 1,517 1,056 1,317 5,971 1,938 30%/16%

Pension Insurance 1,665 1,095 703 651 1,469 3,745 2,567 3,811 25%/31% Corporation (PIC)

Prudential 1,124 0 900 338 412 245 1,710 1,508 10%/12%

Rothesay Life 2,081 904 1,758 1,605 1,372 1,730 1,394 2,333 23%/19%

Scottish Widows 0 0 0 0 0 0 0 400 0%/3%

Total 7,976 3,711 5,260 5,194 4,501 7,507 13,20 3 12,241 100%

The above table shows the total premium paid to insurers by occupational pension schemes, it does not include insurer to insurer back-book premiums.

Due to consolidation within the bulk annuity market, the bulk annuity transactions written by AIG, MetLife Assurance Limited and Paternoster are now shown within Rothesay Life’s figures. Transactions written by Lucida are similarly shown within Legal & General’s figures. The figures for transactions written by Partnership and Just Retirement have been combined, to reflect the ongoing merger.

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B. LARGEST BUYOUTS (EXCLUDING BUY-INS) 2008-2015

Rank Scheme Name Premium (£m) Type Insurer Date Lead Broker

1 TRW 2,500 Pensioners L&G Nov 2014 Mercer

2 Philips 2,400 All PIC Nov 2015 Mercer

3 EMI 1,500 All PIC Jul 2013 Mercer

4 Thorn 1,100 All PIC Dec 2008 Mercer

5 T&N 1,100 All L&G Oct 2011 Mercer

6 Uniq 830 All Rothesay Life Dec 2011 LCP

7 Rank 700 All Rothesay Life Feb 2008 Mercer

8 MNOPF Old Section 680 All Rothesay Life Dec 2012 Towers Watson

9 Lehman Brothers 675 All Rothesay Life Apr 2015 PwC

10 NCR 670 All PIC Nov 2013 Towers Watson

11 Ferranti 600 All Prudential Jun 1999 Mercer

12 LCP 534 All PIC Apr 2015 LCP

13 InterContinental Hotels Group 440 All Rothesay Life Aug 2013 Mercer

14 Powell Duffryn 400 All Paternoster Mar 2008 Hewitt

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C. UK BULK ANNUITY TRANSACTIONS (BUY-INS AND BUYOUTS) OVER £100 MILLION. 2008- 2015

Mercer Lead Name Size £m Type Insurer Date Broker

Confidential — Project Victoria (2/2) 208 All PIC Dec 2015 Y TKW Group 300 All Aviva Dec 2015

Undisclosed 230 Pensioners L&G Dec 2015 Philips Pension Fund (4/4) 2,400 All PIC Nov 2015 Y Confidential — Project Angus 104 All L&G Nov 2015 Y Wiggins Teape 400 Pensioners Scottish Widows Nov 2015 Confidential — Project Verona 2015 118 Pensioners Just Retirement Oct 2015 Y (3/3) Confidential — Project Brussels 188 PPF rescue PIC Aug 2015 Y ICI Speciality Chemicals 219 Pensioners Prudential Aug 2015 Civil Aviation Authority 1,600 Pensioners Rothesay Life Jul 2015 ICI (5/6) 480 Pensioners L&G Jun 2015 Alcatel-Lucent 300 Pensioners Aviva Jun 2015 ICI (6/6) 500 Pensioners Prudential Jun 2015 Lehman Brothers 675 All Rothesay Life Apr 2015 Northern Bank 670 Pensioners Prudential Apr 2015 Undisclosed 534 All PIC Apr 2015 ICI (4/6) 500 Pensioners L&G Mar 2015 Taylor Wimpey plc 206 Pensioners Partnership Dec 2014 Confidential — Project Rome 120 All Rothesay Life Dec 2014 Y Confidential — Project Golf 370 PPF rescue Rothesay Life Dec 2014 Y Aon Minet (3/3) 210 Pensioners PIC Nov 2014 TRW 2,500 Pensioners L&G Nov 2014 Y ICI (3/6) 300 Pensioners Prudential Nov 2014 Undisclosed 200 Pensioners PIC Nov 2014 Uniac 129 Pensioners L&G Oct 2014 Makro 185 All Rothesay Life Sep 2014 Philips Pension Fund (3/4) 310 Pensioners Prudential Sep 2014 Confidential — Project Shale (2/2) 124 Pensioners Rothesay Life Aug 2014 Y Undisclosed 170 Pensioners PIC Jul 2014 Interserve 300 Pensioners Aviva Jul 2014 Total 1,600 Pensioners PIC Jun 2014 Philips Pension Fund (2/4) 304 Pensioners Prudential Jun 2014 Western United Group Pension (3/3) 280 Deferreds Rothesay Life May 2014 Church of England 100 Pensioners Prudential Mar 2014 ICI (1/6) 3,000 Pensioners L&G Mar 2014 ICI (2/6) 600 Pensioners Prudential Mar 2014 Western United Group Pension (2/3) 111 Pensioners Rothesay Life Mar 2014

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C. (CONTINUED)

Mercer Lead Name Size £m Type Insurer Date Broker

GKN (1/2) 123 Pensioners Rothesay Life Jan 2014 NCR 670 All PIC Nov 2013

Undisclosed 220 All PIC Nov 2013 TI Group (4/4) 170 Pensioners PIC Sep 2013 JLT (1/2) 120 Pensioners Prudential Sep 2013 InterContinental Hotels Group 440 All Rothesay Life Aug 2013 Y Philips Pension Fund (1/4) 484 Pensioners Rothesay Life Aug 2013 Equitable Life 336 Deferreds L&G Jul 2013 Y EMI 1,500 All PIC Jul 2013 Y Cobham 280 Pensioners Rothesay Life Jul 2013 Confidential — Project Victoria (1/2) 102 Pensioners PIC Apr 2013 Y First Quench 176 PPF rescue PIC Apr 2013 Confidential — Project Green 255 All L&G Mar 2013 Y Smith & Nephew (main + exec 190 Pensioners Rothesay Life Jan 2013 schemes) Undisclosed 100 Unknown PIC Dec 2012 Tate & Lyle (1/2) 347 Pensioners L&G Dec 2012 MNOPF Old Section (3/3) 680 All Rothesay Life Dec 2012 Undisclosed 122 Unknown PIC Nov 2012 Western United Group Pension (1/3) 115 Pensioners Rothesay Life Nov 2012 General Motors 230 All Rothesay Life Oct 2012 Undisclosed 140 Unknown Prudential Aug 2012 Undisclosed 250 Pensioners L&G Jul 2012 Aon Minet (2/3) 100 Pensioners PIC Jul 2012 Cookson (1/2) 320 Pensioners PIC Jul 2012 Gartmore 162 All PIC May 2012 West Midlands Integrated Transport 272 Pensioners Prudential Apr 2012 Y Authority SR Technics 198 PPF rescue PIC Apr 2012 Y DENSO Marstons 200 All PIC Mar 2012 Undisclosed 103 Pensioners PIC Mar 2012 Undisclosed 227 Pensioners Aviva Dec 2011 Undisclosed 111 All Aviva Dec 2011 Uniq 830 PPF rescue Rothesay Life Dec 2011 Smiths 150 Unknown Rothesay Life Dec 2011 Confidential — Project Magenta 149 All MetLife Nov 2011 Y Meat & Livestock Commission 150 Pensioners Aviva Oct 2011 T&N 1,100 PPF rescue L&G Oct 2011 Y TI Group (3/4) 150 Pensioners Rothesay Life Sep 2011

25 UK BULK PENSIONS INSURANCE

C. (CONTINUED)

Mercer Lead Name Size £m Type Insurer Date Broker

Law Society (2/2) 236 Deferreds MetLife Jun 2011 Y Undisclosed 122 Unknown L&G May 2011

London Stock Exchange 158 Pensioners PIC May 2011 Home Retail Group 278 Pensioners Prudential May 2011 Industrial Training Board 152 Pensioners PIC Apr 2011 Confidential — Project PenCap 210 All CEL Jan 2011 Undisclosed — Banking sector 185 Pensioners Aviva Dec 2010 GlaxoSmithKline 900 Pensioners Prudential Nov 2010 TBC 220 Pensioners L&G Sep 2010 Next 124 Pensioners Aviva Aug 2010 Alliance Boots 320 All PIC Aug 2010 MNOPF Old Section (2/3) 100 Pensioners Lucida May 2010 Undisclosed — Engineering sector 104 Pensioners Aviva Mar 2010 Aggregate Industries (1/2) 210 Pensioners PIC Feb 2010 Confidential — Project Tahoe (1/3) 102 Pensioners MetLife Jan 2010 Y Cadbury 500 Pensioners PIC Dec 2009 CDC 370 All Rothesay Life Nov 2009 Y DENSO Midlands 136 All PIC Sep 2009 MNOPF Old Section (1/3) 500 Pensioners Lucida Sep 2009 Dairy Crest — 2nd transaction 150 Pensioners L&G Jun 2009 Aon Minet (1/3) 150 Pensioners MetLife Jun 2009 Confidential (retail sector) 220 Pensioners L&G Mar 2009 Leyland DAF 230 All PIC Jan 2009 Thorn 1,100 All PIC Dec 2008 Y Dairy Crest — 1st transaction 150 Pensioners L&G Dec 2008 Cable & Wireless 1,050 Pensioners Prudential Sep 2008 The Pensions Trust 225 Pensioners Paternoster Sep 2008 TI Group (2/4) 250 Pensioners Paternoster Sep 2008 West Ferry Printers 130 Pensioners Aviva Sep 2008 Ofcom 150 Pensioners L&G Jul 2008 Delta 451 Pensioners PIC Jun 2008 Weir Group — 2nd transaction 110 Deferreds L&G Apr 2008 Y BBA 270 Pensioners L&G Apr 2008 Industry Wide Scheme 160 Pensioners L&G Apr 2008 Friends Provident 350 Pensioners Aviva Apr 2008 TI Group (1/4) 250 Pensioners L&G Mar 2008 Powell Duffryn 400 All Paternoster Mar 2008 M-Real Corporation (UK Paper) 180 All L&G Mar 2008 Y Morgan Crucible 160 Pensioners Lucida Mar 2008 Rank 700 All Rothesay Life Feb 2008 Y

26 MARKET REVIEW 2016

D. UK SCHEME LONGEVITY SWAP TRANSACTIONS 2008-2015

Pension Scheme Size £m Date Reinsurer/Counterparty

Undisclosed plan 90 Dec 2015 SmartDB (Mercer)/Zurich Assurance RAC 600 Nov 2015 Scor

Scottish & Newcastle 2,400 Sep 2015 Friends Life (Aviva)/Swiss Re AXA 2,800 Jul 2015 Reinsurance Group of America ScottishPower 2,000 Feb 2015 Deutsche Bank/Abbey Life MNOPF 1,500 Jan 2015 Pacific Life Re Phoenix Group 900 Aug 2014 Reinsurance Group of America BT 16,000 Jul 2014 Prudential (USA) Aviva 5,000 Mar 2014 Munich Re/Scor/Swiss Re Carillion 1,200 Dec 2013 Deutsche Bank BAE (2/2) 1,700 Dec 2013 L&G AstraZeneca 2,500 Dec 2013 Deutsche Bank/Abbey Life British Airways (3/3) 280 Dec 2013 Goldman Sachs/Rothesay Life Bentley 500 May 2013 Deutsche Bank/Abbey Life BAE (1/2) 3,200 Feb 2013 L&G LV= 800 Dec 2012 Swiss Re Akzo Nobel 1,400 May 2012 Swiss Re British Airways (2/3) 1,300 Dec 2011 Goldman Sachs/Rothesay Life/Pacific Life Re Pilkington 1,000 Dec 2011 L&G/Hanover Re Rolls-Royce 3,000 Nov 2011 Deutsche Bank/Scor ITV 1,700 Aug 2011 Credit Suisse/Pacific Life Re Pall 70 Jan 2011 JP Morgan British Airways (1/3) 1,300 Jun 2010 Goldman Sachs/Rothesay Life BMW 3,000 Feb 2010 Deutsche Bank/Abbey Life County of Berkshire 750 Dec 2009 Swiss Re CDC 400 Nov 2009 Goldman Sachs/Rothesay Life RSA 1,900 Jul 2009 Goldman Sachs/Rothesay Life/Pacific Re Babcock 1,200 Feb 2009 Credit Suisse

27 UK BULK PENSIONS INSURANCE

CONTACT US

DAVID ELLIS ADRIAN MARSHALL Bulk Pensions Insurance Advisory Bulk Pensions Insurance Advisory 0113 394 7591 0161 837 6583 [email protected] [email protected]

HARRY HARPER PHIL CAINE Bulk Pensions Insurance Advisory Bulk Pensions Insurance Advisory 0161 837 6623 0161 837 6551 [email protected] [email protected]

MARTYN PHILLIPS MIKE FRANKS Bulk Pensions Insurance Advisory Bulk Pensions Insurance Advisory 01483 777 248 0161 837 6629 [email protected] [email protected]

STEPHEN PURVES SUTHAN RAJAGOPALAN Bulk Pensions Insurance Advisory Financial Strategy Group 0113 394 7612 020 7178 3669 [email protected] [email protected]

NEIL ROGERS MARC LOH Bulk Pensions Insurance Advisory Oliver Wyman 0113 394 7589 01372 389 608 [email protected] [email protected]

DAVID ARKINSTALL Bulk Pensions Insurance Advisory 0113 394 7620 [email protected]

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