MARKET REVIEW 2016
HEALTH WEALTH CAREER UK DB BULK PENSIONS INSURANCE
MARKET REVIEW SECOND EDITION, JULY 2016
1 UK DB BULK PENSIONS INSURANCE
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CONTENTS
01 02 03
FOREWORD - A BUMPY START - £12 MEDICAL UNDERWRITING WELCOME TO THE BILLION OF BULK ANNUITY – A KEY TO UNLOCKING SECOND EDITION TRANSFERS TOOK PLACE IN OPPORTUNITIES OR THE THE FIRST HALF OF 2016 KEY TO PANDORA’S BOX?
04 05 06
LONGEVITY SWAPS – THE ART OF ASSESSING MERCER PENSION RISK INCREASING RANGE OF YOUR SCHEME’S LONGEVITY EXCHANGE® - CREATING A OPTIONS FOR EFFICIENT RISK AND DECIDING CLEAR LINE OF SIGHT TO A LONGEVITY RISK TRANSFER WHETHER TO BUY POTENTIAL “END GAME” PROTECTION
07 08 09
A REVOLUTION IN THE ALIGNING INVESTMENTS AS WHY ARE INCREASING SETTLEMENT OF LARGE PART OF A BULK ANNUITY NUMBERS OF SCHEMES PENSION LIABILITIES TRANSACTION C A R R Y I N G O U T A PENSIONER BUY-IN?
10
LIST OF BULK ANNUITY AND LONGEVITY SWAP TRANSACTIONS
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01. FOREWORD
WELCOME TO THE SECOND EDITION OF UK DB BULK PENSIONS INSURANCE — MARKET REVIEW. In our fast moving and volatile “post Brexit” world, it is now even easier than it was to miss the right deal or the right opportunity. Bulk pensions insurance policies are irreversible and decisions made, or not made, have long-lasting outcomes. Keeping in touch with the latest developments in the UK DB bulk pensions insurance market is David Ellis Mercer UK Leader, important for all stakeholders, so we have sought Bulk Pensions Insurance Advisory to bring you the latest information in this market review, including all the latest deal statistics – articles 02, 04 and 10, and how to get actual insurer prices every month – article 06.
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Rapidly changing political and economic circumstances remove much or all of a sponsoring employer’s legacy following the UK’s vote to leave the European Union have pension liabilities at economics that can be substantially reinforced the need for trustees and sponsors to look different from desktop estimates. Plans of all sizes again at their pension schemes, to check that what they can be transformed, sometimes in short periods and are doing continues to be relevant and importantly to a number have now successfully done this – more in check that the overall level of risk the scheme is running article 07. continues to be appropriate. The UK bulk pensions insurance market is increasing Bulk annuity pricing has been robust, despite the in size over time as many sponsoring employers and continued reduction in low risk yields (gilts) over the first trustees aim to move their UK pension obligations to half of 2016 and several schemes have accelerated their an insurer by purchasing a bulk annuity. bulk annuity processes to take advantage. Pricing has remained particularly keen for pensioners in payment, Over the last 25 years, approximately £80 billion in DB relative to gilts, and that is where we have seen the obligations has been transferred to insurers using bulk majority of transactions so far during 2016 – more in annuities plus £60 billion using longevity swaps, but this article 02. For deferred members, the market continues will be dwarfed by transaction volumes expected in the to see significant pricing differences between insurers next 20 years as it becomes increasingly attractive to as consensus views on deferred member pricing under make such transactions. the new Solvency II regime introduced on 1 January 2016 take time to bed in. Mercer’s Bulk Pensions Insurance Advisory group has led on more than £17.5 billion of UK buy-in and buyout In this edition, we have brought you new points of view, transactions, more than any other advisor, including all on medical underwriting (MUBA) and on longevity only five buyouts in the UK involving a premium above £1 billion. insurance – see articles 03 and 04. The core broking team, numbering 22 individuals with 200 years of combined experience, partners with others Evidence continues to emerge of increased take up at Mercer and its sister companies, Marsh and Oliver of member options, encouraged by the Government’s Wyman, to offer a genuine one-stop shop for all advisory introduction in April 2015 of the right of members to take and transactional services in relation to pension buy-ins, money purchase funds as cash from age 55. This has buyouts, and wind-ups. led to increased member interest in electing to transfer from DB to money purchase, when transfer values are set Mercer Pension Risk Exchange® — see article 06 — enables at a generous level and comprehensive member advice is buyers and sellers of bulk annuities to come together to provided. This can be a win-win-win for the sponsoring monitor prices and rapidly transact, a way of interacting employer and trustees (by removing obligations) not seen before, as recognised by both Pensions Age and and members (by offering them benefits options). European Pensions as “Innovation Award of the Year” 2016. Furthermore, a combination of member options, set at a generous level, and annuitisation can successfully
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02. A BUMPY START - £12 BILLION OF BULK ANNUITY TRANSFERS TOOK PLACE IN THE FIRST HALF OF 2016 (BUT ONLY £3 BILLION FROM PENSION SCHEMES)
Last year’s £12bn of pension scheme bulk annuity purchases has been almost replicated in just the first half of 2016, but only £3bn of this is from pension schemes and almost all is in respect of pensioners who are already in payment. Solvency II has been the main driver – persuading many life insurers to sell off their legacy annuity books to the active bulk annuity insurers and also creating (temporary) problems for insurers trying to price deferred members.
Harry Harper Bulk Pensions Insurance Advisory
The second “post Brexit” half of 2016 promises to be Key themes for the second half of the year will be: interesting now that the volume of quotation requests from pension schemes has increased rapidly mid-year. • Volatility in markets: There is potential for significant The nature of the quotation requests is also changing, bulk annuity pricing opportunities to appear, for those in instead of the pensioner only pricing requests from earlier the right place at the right time in 2016, we now see a growing number of exercises that include deferred members. • Freedom and choice: Continued member demand for options provides a key way to reduce overall settlement costs
• Deferred member pricing: The wide range of pricing seen for deferred members since the introduction of Solvency II from 1 January 2016 shows indications of stabilising. We see signs of more aggressive pricing for those members in the second half of the year
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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
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
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KEY THEMES FROM THE LAST 12 MONTHS
Insurer pricing
Insurer pricing has remained aggressive into 2016 for pensioners in payment,with pricing for these members remaining significantly lower than the cost of backing the same liabilities using gilts. During 2016 we have seen Scottish Widows join three other insurers, Legal & General, Pension Insurance Corporation and Rothesay Life, to write £3 billion of (reported) pensioner in payment business between them during the first half of 2016. Legal & General and Rothesay Life have also taken on, between them, £9 billion of insurer back-book legacy annuities. Overall, the message is clear that regardless of Solvency II, the bulk annuity insurers remain able and keen to write huge transactions, at competitive prices, relative to say the cost of meeting those liabilities using gilts.
Large combined deals
The largest recent deal was the £2.4 billion buyout by Philips, insured with Pension Insurance Corporation (PIC) in November 2015. Alongside this trade was more than £1.1 billion of the same scheme converted during the year from buy-in to buyout with Rothesay Life and Prudential. The Philips transaction (like the TRW transaction in 2014 that was placed with Legal & General) emphasises the ability to financially re-engineer pension schemes, creating value via a coordinated and combined package that allows members to take valuable options, supported with high-quality financial advice, against a background of annuitisation — more in article 07.
Medical Underwriting
Last year saw the continuing and growing use of medical underwritten bulk annuities (MUBAs) to broaden the range of solutions being adopted to de-risk pension schemes. We see this continuing in 2016 – more in article 03.
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REPORTED 2016 BULK ANNUITY TRANSACTIONS, TO 30 JUNE:
£330m pensioners Legal & General ICI (7th tranche)
£900m pensioners Pension Insurance Corporation Aon’s own scheme
£200m pensioners Scottish Widows Undisclosed scheme
£50m pensioners Scottish Widows Barloworld
£10m full buyout Pension Insurance Corporation Undisclosed scheme
£630m pensioners Scottish Widows ICI (8th tranche)
£90m pensioners JRP Group Galliford Tr y
£350m (various) Legal & General Several Q2 transactions
£750m pensioners Legal & General ICI (9th tranche)
£3bn
REPORTED 2016 INSURANCE COMPANY BACK-BOOK TRANSFERS, TO 30 JUNE:
£6bn pensioners Rothesay Life AEGON’s back-book
£3bn pensioners Legal & General AEGON’s back-book
£9bn
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03. MEDICAL UNDERWRITING – A KEY TO UNLOCKING OPPORTUNITIES OR THE KEY TO PANDORA’S BOX?
The Medically Underwritten Bulk Annuity (“MUBA”) market has developed out of the established individual retail annuity market, with several insurers now offering solutions. The first MUBAs were only completed as recently as December 2012, yet during 2015 they accounted for over 25% of all bulk annuity deals below £100m (these deals can also be expressed as representing almost 10% of all bulk annuity deals by value or nearly one third by number over 2015). Over the 3 years since their emergence, MUBAs have Martyn Phillips now established themselves firmly as a viable option for Bulk Pensions Insurance Advisory pension scheme de-risking.
The first two insurers active in this market (Partnership amongst the population is made. In reality, MUBAs are a late in 2012 and then Just Retirement in 2013) were natural extension to the bulk annuity market in that, over both mono-line insurers from the retail annuity market recent years, insurers have sought to use increasingly that specialised in medical underwriting (between detailed data to value liabilities on a more refined basis. these insurers they have written over 90 MUBAs to the end of 2015, covering well in excess of £1.5bn of The ultimate aim of MUBAs, for sponsoring employers liabilities). These two insurers merged in the early and trustees, is to achieve a premium saving where 2016 to form JRP Group. the members being underwritten have shorter life expectancies than the insurers would otherwise assume. In addition, established UK life insurers Aviva and Legal & General have interest in MUBAs, alongside their conventional In addition to MUBAs involving entire pensioner populations, (not medically underwritten) annuity business - although schemes often may have a relatively small number of between them they have only completed a handful of MUBAs members who carry a significant and disproportionate to date, with Legal & General’s “top-slicing” transaction with proportion of the overall liability – completing a MUBA Kingfisher at the end of 2015 at £230m being the largest for only this population is termed a “top-slicing” MUBA. MUBA so far. Under a top-slicing MUBA, the largest pensions in payment may account for a large proportion of the total A MUBA attempts to discover additional information in pensioner liabilities (and in the absence of health and relation to members’ health and lifestyle (and hence lifestyle information, insurers would typically include their individual life expectancies). Traditionally, the margins for prudence within their longevity assumptions longevity assumptions made by insurers for bulk annuity for such large individual liabilities). It only takes a small pricing purposes have been based primarily on only four proportion of these members or their spouses to have key member risk indicators; age, sex, postcode and size some conditions (diabetes, high blood pressure, etc.) in of pension, together with scheme mortality factors; order to have a material impact on their premium and a industry of employer, historical information and nature of sufficient enough impact on the whole scheme to make employment. An “allowance” for some level of impairment the exercise potentially worthwhile.
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If just a cross section of the membership of the scheme Whilst there are potential financial gains to be made as a is to be insured, then insurers will want to see that this result of medical underwriting, there are other important cross section has been chosen in a straight forward considerations to be debated: manner, for example all pensioners above £X per annum. All members in that category would then be included • Additional work and potentially longer timescales involved within a transaction whether or not they provide health and lifestyle information – it is important for the insurers • Additional expenses potentially incurred to complete to be able to convince themselves that a “cherry picked” a transaction population has not been used. • Potential exclusion from future access to part of the A potential ancillary benefit of medical underwriting is bulk annuity market (currently 5 insurers will not be that, in having up to date information on members’ current willing to provide pricing for a few years after medical health status, insurers may reduce the level of margins for underwriting information has been collected as they are prudence that would otherwise be included in their pricing unable to use this data) – this is “Pandora’s Box” – once bases, thereby reducing the premium otherwise charged. you have gathered this information, you cannot “un- know it” and are compelled to disclose you have it MUBAs will not be suitable for all schemes. As trustees will be required to share any medical data with insurers, • A higher price could be the outcome if the population is before embarking on a process of obtaining underwritten healthier than “average” quotations they should consider whether they believe an underwritten approach could be advantageous. Some of • Importance of considering spouses entitlements as details the points for detailed consideration before embarking on of spouses existence and their health will be collected a process would include: • Reaction of membership to request to provide medical • Numbers of members to be included and lifestyle information
• Any areas of high concentration of risk (i.e. could “top- • Ensuring an appropriate technical provisions figure for cost slicing” be viable) assessment (applicable solely to top slicing transactions)
• Known health or lifestyle conditions amongst population On balance, there may well be possible upsides to embarking being considered on a MUBA, but all parties should embark on such a journey fully informed and with the greatest insight into the • Strong view by trustees and/or sponsor on life potential outcomes and implications for moving forward expectancy of pensioners (given their insight to the towards a transaction. We do see the market for MUBAs population under consideration) which may differ to increasing, however, the approach to such trades and the insurers and scheme actuary views processes adopted need to be carefully considered and as many options kept open until such point in time when a • Historic number of ill-health early retirements transaction can be pursued.
POSSIBLE APPROACH TO INTEGRATING MUBAS INTO A BULK ANNUITY BROKING PROCESS
Negotiate and choose insurer (Non- underwritten)
Complete OR Negotiate and underwriting Scheme receives first round of choose insurer post-buy-in (with non-underwritten pricing) (medically- or without cap on underwritten) OR price impact)
Medical 3rd party 3rd party data questionnaire/ Negotiate and specialist room for sensitive interviews/GPRs choose insurer data gatherer medical data (c4-6 weeks)
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04. LONGEVITY SWAPS – INCREASING RANGE OF OPTIONS FOR EFFICIENT LONGEVITY RISK TRANSFER
Andrew Ward Mercer UK Leader, Longevity Risk Transfer, Financial Strategy Group
THE CHALLENGE: THE IMPACT OF INCREASING ADDRESSING LONGEVITY RISK L I F E E X P E C T A N C Y
The majority of schemes have taken at least some steps to Increasing life expectancy has been a major factor in rising manage equity, interest rate and inflation risks. However, deficits over recent periods — unanticipated increases in longevity risk is often completely unhedged. Furthermore, life expectancy have added approximately £250 billion to unlike growth assets, longevity risk is not typically held UK private sector liabilities over the past 10 years alone with an expectation that it will help close the funding gap. — with the associated damaging impact on contribution requirements and company balance sheets.
It remains possible that schemes are continuing to under- reserve for longevity improvements. Indeed, Fitch Ratings noted in August 2015 that “rising life expectancy is a greater threat than low interest rates”. Similarly, recent research by State Street in “Pensions with Purpose: Meeting the Retirement Challenge” showed longevity risk as the biggest concern for pension schemes.
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Unlike bulk annuities, longevity swaps do not require Unanticipated increases in payment of assets to the counterparty at the outset of the contract. This provides additional flexibility as assets life expectancy have added can remain invested either to generate returns or to manage other risks as required. approximately £250 billion From a corporate sponsor’s perspective, a longevity swap to UK private sector liabilities offers the potential to remove a risk that is often viewed as “unrewarded” without crystallising a funding deficit. over the past 10 years alone. Furthermore, a swap can be transacted without adversely impacting the balance sheet or profit and loss (P&L) under the International Accounting Standard, IAS19. THE SOLUTION – LONGEVITY SWAPS? NEW DEVELOPMENTS Bulk annuities clearly remove this longevity risk, along with all other risks and can allow schemes and sponsors The market for hedging longevity risk continues to to fully settle liabilities. Therefore, they will remain the develop. There are now a number of alternative structures longer term goal for a large number of pension schemes. that can be used to hedge risk as illustrated below. These However, underfunding or a concern about locking-in to can either offer easier implementation, lower costs or current low yields may be a constraint for some schemes more flexible hedges - the most appropriate approach will in the shorter term. depend on scheme specific criteria.
OPTION TRADITIONAL PASS-THROUGH STREAMLINED
WHAT IS IT? • Insurance contract with a UK insurer • Bespoke “captive” or • Contract with a UK insurer based on acting as direct counterparty insurer “pass-through” structure pre-agreed contractual terms • Reinsurance capacity accessed via acts as intermediary • Streamlined broking process involving a transparent broking process • Scheme directly exposed a pre-agreed panel of reinsurers • Contractual terms (including to the strength of reinsurers • Uncollateralised collateral) negotiated on a case • Traditional fronters and consultants by case basis are now proposing “off the shelf” structures
TRANSACTION SIZE >£500m >£1bn <£750m
BENEFITS Tried and tested with insurer managing Reduction in intermediation costs for Simplified structure allows smaller operational and collateral processes larger schemes schemes to efficiently manage Access to UK PRA regulated More flexible in the event of longevity risk insurer and recourse to FSCS future novation Access to UK PRA regulated insurer and recourse to FSCS
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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 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 Smart DB (Mercer)/Zurich Assurance
Undisclosed Dec 2015 750 Undisclosed
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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 Undisclosed -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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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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Greater volumes of experience data and improved • Comparative mortality modelling for smaller schemes: computing power have led to a better understanding by firm, evidence-based assessment of longevity using insurers of annuitants’ life expectancies. However, pension knowledge of similar individuals in other schemes schemes of all sizes already have enough data at their disposal to use techniques similar to insurers in estimating • Bespoke mortality modelling for larger schemes where the longevity of their members, enabling schemes to: a significant amount of longevity experience data is available: modelling techniques to assess scheme- • Assess the reasonableness of longevity swap pricing specific longevity experience without the constraints of “standard” tables • Assess the reasonableness of bulk annuity pricing • For those in the middle, with some degree of longevity • Consider partial or total medical underwriting experience data: “credibility-weighted” outcomes that adjust “smaller scheme” studies to make appropriate Mercer licences the same industry-leading and allowance for the limited experience data held academically reviewed longevity analysis techniques as used by the majority of UK insurers, and we’re the only Going through an exercise to assess a scheme’s longevity UK consultancy to do so. Having the right technology, risk will help reduce future insurance premiums by being together with our own pension scheme experience data better informed in negotiations, demonstrating credibility collected for more than one million annuitants, plus to insurers, and by highlighting in advance the scheme extensive experience in advising on mortality assumptions data areas that need correction or clarification. for a wide range of clients, enables us to undertake:
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06. 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?
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Improved information becomes more critical when a buy-in or buyout is being considered, as sponsoring employers and trustees need to know they’re doing the right thing at the right time in managing their pension obligations and need to know the commercial insurance pricing for their own pension plans at all times, enabling them to take any opportunities that could arise.
The UK pension buy-in and buyout market hasn’t always lived up to these ideals, and in many “An impressive ways hasn’t operated as efficiently as it could. Sometimes insurer pricing has been difficult submission in a to obtain quickly and cheaply, and obtaining regular insurer pricing has tended to require a highly competitive bespoke approach with either just one insurer or a small group of insurers. This approach isn’t category, this firm’s easy to maintain for lengthy periods and may inadvertently omit insurers that could have entry displayed true offered the best pricing at that time. innovation with Mercer Pension Risk Exchange® solves these problems and, as a result, has won the Pensions clear benefits for the Age “Innovation Award of the Year” 2016 and the European Pensions Innovation Award, 2016. pensions space.” It brings real clarity to the UK pension buy-in and buyout market by supporting a two-way — Pensions Age, 2016 information flow between buyers and sellers of bulk annuities and provides information (Innovation Award everyone needs, instilling the confidence needed for decision-makers to act decisively of the Year) when the time is right.
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PRICES OBTAINED VIA MERCER PENSION RISK EXCHANGER ARE ACTUAL INSURER PRICES
The Exchange provides pricing directly from the 1. Mercer Pension Risk Exchanger is a transparent, insurers on a regular basis — not pricing estimated online platform bringing together buyers and by Mercer derived from broader insurer pricing sellers of pension buy-ins and buyouts. This information. This is real-life insurer pricing, not facilitates the discovery of opportunities in a way indicative pricing. It’s like receiving a range of formal never seen before. bids from insurers each month, often starting years before pension plans are ready to transact. 2. The Exchange allows insurers to see your pension plan’s (anonymised) data directly and permits Insurers’ pricing and terms are based on transaction- insurers to make exclusive proposals for buy-in or quality, detailed, plan-specific disclosures covering buyouts that you wouldn’t otherwise obtain; for not only the plan’s benefits and individual member example, if an insurer is temporarily able to offer level data but also the plan’s wider commercial improved pricing. situation — the same information that is used when plans actually transact. 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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INSURER HITS SALES TARGET LEADING TO REDUCED APPETITE
NEW ENTRANT’S PREMIUM 10% “NORMALISES”
INSURER KEEN TO WIN BUSINESS BEFORE ITS NEW ENTRANT YEAR-END PRICING LOWER TO ATTRACT BUSINESS INSURER HAS INCREASED A PPETITE FOR BUSINESS
SEVERAL MONTHS
“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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07. 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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08. 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 Schemes that have used successfully extensive pre- part 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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09. 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 • Volatility in financial markets hasn’t been a barrier, as and scheme sponsors continues to grow as they look the trustees and scheme sponsor are firmly in control for the best ways to manage their long-term risks. of when the transaction takes place. After obtaining Here are some of the reasons pensioner buy-ins initial pricing from insurers, it’s possible to monitor the are currently thriving: cost of a pensioner buy-in over an extended period and only proceed when the economics are right. Mercer has • Pension schemes don’t have to be fully funded to carry worked with many clients on this basis, and extracting out a pensioner buy-in. Furthermore, most schemes this value from the market is a key feature of the Mercer don’t require a cash injection from the sponsor to Pension Risk Exchange® platform (see article 06). transact. It’s common for a pensioner buy-in not to give rise to a material strain relative to the full funding • Completing a pensioner buy-in doesn’t prevent the reserve that a typical pension scheme would hold for scheme’s deferred liabilities from being insured at a the pensioner liabilities. In fact, many schemes with later date. Bulk annuity transactions covering just the conservative funding bases transact at prices below deferred members are very common. their full funding reserve. • Going to market to obtain pricing in respect of • A pensioner buy-in can make the funding of the pensioner liabilities on a standalone basis has never remaining liabilities easier to manage. Once the funding been easier. As schemes look to better manage their risk for the pensioner liabilities is removed, trustees ongoing funding risk, pensioner buy-ins will continue to and sponsors may be better placed to address the form a significant part of long-term de-risking strategies. 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.
25 UK DB BULK PENSIONS INSURANCE
10. LIST OF BULK ANNUITY AND LONGEVITY SWAP TRANSACTIONS
A. UK BULK ANNUITY TRANSACTIONS BY INSURER (£M)
Market share 2016 2008- 2008 2009 2010 2011 2012 2013 2014 2015 (publicized 2014/2015- to 30 June) 2016
Aegon 124 155 26 0 0 0 0 0 0 1%/0%
Aviva 881 176 873 1,076 188 379 874 984 0 9%/6%
Canada Life 0 1 1 7 1 0 0 32 0 0%/0%
Just Retirement 0 0 0 0 4 91 688 1,235 95 2%/9% & Partnership
Legal & General 2,101 1,380 999 1,517 1,056 1,317 5,971 1,977 1,430 30%/22% (L&G)
Pension Insurance 1,665 1,095 703 651 1,469 3,745 2,567 3,811 910 25%/30% Corporation (PIC)
Prudential 1,124 0 900 338 412 245 1,710 1,508 0 10%/10%
Rothesay Life 2,081 904 1,758 1,605 1,372 1,730 1,394 2,333 0 23%/15%
Scottish Widows 0 0 0 0 0 0 0 400 880 0%/8%
Total 7,976 3,711 5,260 5,194 4,501 7,507 13,20 3 12,280 3,315 100%
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
27 UK DB BULK PENSIONS INSURANCE
C. PPF BUYOUTS (SINCE THE CREATION OF THE PPF IN 2005)
Scheme Name Size (£m) Insurer Date Lead Broker
Undisclosed 190 PIC 2015 Mercer
MIRA 70 PIC 2015 LCP
Undisclosed 380 Rothesay Life 2014 Mercer
First Quence 180 PIC 2013 LCP
MF Global 50 PIC 2013 LCP
SR Technics 190 PIC 2012 Mercer
T&N 1100 L&G 2011 Mercer
Uniq 830 Rothesay Life 2011 LCP
Dana Manufacturing 75 L&G 2010 Mercer
Undisclosed 25 L&G 2010 Mercer
Undisclosed 5 AIG 2009 Mercer
QH 100 L&G 2008 Mercer
28 MARKET REVIEW 2016
D. UK BULK ANNUITY TRANSACTIONS (BUY-INS AND BUYOUTS) OVER £100 MILLION. 2008- 2015
Mercer Lead Name Size £m Type Insurer Date Broker
ICI (9) 750 Pensioners L&G Jun 2016 ICI (8) 630 Pensioners Scottish Widows Jun 2016 Undisclosed 200 Pensioners Scottish Widows Apr 2016
ICI (7) 330 Pensioners L&G Mar 2016 Aon 900 Pensioners PIC Mar 2016 VA Tech (Siemens) (2/2) 208 All PIC Dec 2015 Y TKW Group 300 All Aviva Dec 2015 Kingfisher 230 Pensioners (med) 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 (6) 500 Pensioners Prudential Jun 2015 ICI (5) 480 Pensioners L&G Jun 2015 Alcatel-Lucent 300 Pensioners Aviva 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) 500 Pensioners L&G Mar 2015 Taylor Wimpey plc 206 Pensioners (med) 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) 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 (2) 600 Pensioners Prudential Mar 2014 ICI (1) 3,000 Pensioners L&G Mar 2014 Western United Group Pension (2/3) 111 Pensioners Rothesay Life Mar 2014
29 UK DB BULK PENSIONS INSURANCE
D. (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
30 MARKET REVIEW 2016
D. (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
31 UK DB BULK PENSIONS INSURANCE
E. UK SCHEME LONGEVITY SWAP TRANSACTIONS 2008-2015
Pension Scheme Size £m Date Reinsurer/Counterparty
Undisclosed plan 750 Dec 2015 Undisclosed 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
32 MARKET REVIEW 2016
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]
JO CARTER ANDREW WARD Bulk Pensions Insurance Advisory Financial Strategy Group 0161 837 6576 020 7178 3458 [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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