lcp pensions de-risking quarterly update q1 … · p3 q1 2015 buy-in price monitoring p4 this...
TRANSCRIPT
In thIs Issue
p2 2014 year end market update
p3 Q1 2015 buy-in price monitoring
p4 This quarter’s FAQ
In this edition we look at:
� New business volumes written in 2014 – a record year on all
counts;
� A snapshot of current pensioner buy-in pricing – to inform
decisions about when to approach the market; and
� Structuring a buy-in – how to reduce risk across the whole
scheme.
LCP PensIons De-RIsKInG QuARteRLY uPDAte Q1 2015
Longevity de-risking – a new era?
Welcome to LCP’s review of the latest developments in the buy-in, buy-out and longevity swap market.
Volume of buy-ins and buy-outs from 2007 to 2014
14
2007 2010 20132008 2011 20142009 2012
8
12
6£ b
illio
n
10
4
2
0
LCP Pensions buy-in and buy-out masterclass
Making your next de-risking step really count - insights and practical tips
28 April 2015 9:00AM
Hear from a number of guest speakers,
including industry practitioners and clients
who have undertaken recent transactions.
The masterclass will provide trustees and
corporate sponsors with insights and
practical tips to prepare effectively to take
advantage of opportunities as they arise
and achieve competitive commercial terms
and pricing in any future transaction.
To register please visit:
www.lcp.uk.com/events
Source: LCP analysis
First half Second half
LCP Pensions de-risking quarterly update 2015 2
2014 saw records smashed in both the bulk annuity
and longevity swap markets, with activity exceeding
all previous expectations. Volumes for buy-ins and
buy-outs exceeded £13 billion. Combined with c£22
billion of longevity risk hedged using longevity
swaps, this saw 2014 recorded as the biggest year for
insurance de-risking activity to date.
LCP’s analysis of insurers’ data for 2014 shows:
� Legal & General (L&G) was the lead insurer for 2014
with a market share of 45% of premium written.
� L&G’s total of c£6 billion for 2014 was driven by
a small number of major transactions, including
the ICI Pension Fund buy-in at £3.0 billion and the
TRW Pension Scheme buy-out at £2.5 billion.
� Pension Insurance Corporation (PIC), which was
the market leader in 2012 and 2013, had a market
share of 19% in 2014, including their most notable
transaction: the £1.6 billion buy-in with the Total UK
Pension Plan.
Large transactions came to the fore in 2014, with 10
transactions making up 75% of the total premiums
paid over the year. A number of these transactions
included innovative security structures in return for
an additional premium. These were designed to
provide extra policyholder protections to add to the
protections provided by the insurance regime itself,
such as insurer capital requirements and regulatory
oversight.
The longevity swap market also had a record year
with £21.9 billion of liabilities hedged. This was
similarly achieved through innovation. The BT
Pension Scheme entered into a £16 billon longevity
swap through a trustee-owned captive insurer, so the
trustee could access the reinsurance market directly.
Since the end of 2014 there have been two further
longevity swaps covering £3.5 billion of liabilities, one
of which also used a wholly owned captive structure
to access reinsurers directly.
Keeping with this trend 2014 was also a record-
breaking year for LCP. We were lead advisers on
12 of the 21 buy-in and buy-out transactions over
£100 million over 2014, including ICI, Total and
Philips plus a wide range of smaller transactions.
Buy-in / buy-out premium written in 2014 (£m)
Q1
2014
Q2
2014
Q3
2014
Q4
2014
total
2014
total
2013
Aviva 135 128 487 123 874 379
Just Retirement 37 50 25 330 441 6
Legal & General 3,051 82 228 2,618 5,980 1,320
Partnership 34 3 0 210 247 84
PIC 148 1,659 170 590 2,567 3,745
Prudential 730 300 376 300 1,706 245
Rothesay Life 234 322 305 510 1,371 1,674
total 4,369 2,544 1,591 4,680 13,185 7,493
Numbers may not total due to rounding
Source: LCP analysis
Pension liabilities covered by longevity swaps in 2014 (£m)
Intermediary insurer Q1 Q2 Q3 Q4 total
Aviva 5,000 - - - 5,000
Phoenix Life - - 900 - 900
trustee-owned captive - - 16,000 - 16,000
total 5,000 - 16,900 - 21,900
Source: LCP analysis
Further details can be found in LCP’s report
“Buy-ins, buy-outs and longevity swaps 2014”
available at www.lcp.uk.com/buyoutreport.
Record de-risking in 2014 marks the start of a new era in the bulk annuity market.
3LCP Pensions de-risking quarterly update 2015
Market knowledge is the key to understanding pricing in volatile markets.Quarter 1 2015 saw continued volatility in bond markets, with the yields on long-dated UK gilts
dropping below 2% pa at times. This inevitably put pressure on buy-out pricing in absolute terms,
albeit this was offset by strong equity performance as the FTSE100 reached a record high in February.
The pricing of buy-in and buy-out transactions has continued to be attractive compared with a typical
pension scheme’s technical provisions, with pensioner buy-in pricing at the start of 2015 close to a
“gilts flat” return for a typical scheme. Premiums have however been volatile during the first quarter
as market conditions have fluctuated.
Pricing changes over the period highlighted the need to understand the insurance companies and the
way in which they set their premiums, rather than simply looking at market indicators when setting a
pricing estimate.
There was positive news for pension schemes with benefits linked to the Consumer Prices Index.
Insurers are now pricing these benefits more competitively, despite ongoing challenges in sourcing
suitable backing assets.
Looking forward, Solvency II, the new European wide funding regime for insurance companies, will
have a direct impact on pricing
levels. Implementation is scheduled
for January 2016, but the publication
of further technical guidance by the
Prudential Regulation Authority at the
end of March 2015 will provide greater
clarity on the final position.
As ever, it is important to access
consulting expertise alongside pricing
tools such as Visualise to understand
market and insurer dynamics which
feed into the identification of attractive
pricing opportunities.
LCP Visualise helps pension plan
trustees and sponsors identify
when to approach the market,
based on a range of indicative
insurer pricing.
LCP Pensions de-risking quarterly update 2015 4
how do I structure a pensioner buy-in to reduce risk across the whole pension scheme?
The benefits of a buy-in policy are well known: in short, a monthly income paid to the trustees that they can use to pay the pension payments due to the members covered for as long as they live. However, when implementing a buy-in it is important to consider it in the context of the other liabilities in the scheme to ensure that the overall risk profile is reduced as intended.
There are three key areas to consider:
� The required level of future investment returns;
� Overall protection against movements in financial markets; and
� Any liquidity requirements of the scheme.
By its nature, a buy-in removes inflation, interest rate, investment and longevity risk for those members insured, and the price of the policy can be expressed as an equivalent investment return. It is therefore possible to compare the hedging levels and return provided by the buy-in with those of the assets being used to pay for the policy.
At current pricing levels, if gilts are exchanged for a pensioner buy-in, the funding impact is likely to be neutral. However, if the expected return of the assets being used to purchase the policy is greater than that of the buy-in, trustees should be comfortable that any reduction in expected overall return is
acceptable in the context of the scheme’s funding plan.
In terms of the scheme’s overall protection against movements in interest rates and inflation, trustees will typically aim for this to be maintained or reduced following the buy-in. If the assets being used to pay the premium only provide hedging for the pensioner liabilities, then no further action may be needed. If however the assets are longer-dated and provide some interest rate and inflation protection for deferred members, trustees may wish to tailor the size of the transaction so that some longer-dated gilts are retained alongside the pensioner buy-in.
The final area to consider is the scheme’s ability to meet benefit payments and other cash calls. Buy-ins typically improve liquidity as they provide a matching cash flow for the insured population, but trustees will also want to check that they have sufficient liquid assets for other purposes. This could include, for example, any collateral calls if the scheme runs a wider LDI strategy or if transfer requests increase post-April 2015.
By actively considering these three areas, and tailoring the size of the buy-in, trustees can ensure that the transaction meets the scheme’s overall de-risking objectives.
Frequently asked questionshow LCP can helpSome useful next steps for trustees/
companies looking to investigate
insurance de-risking options further
include:
� trustee training – a useful way
to ensure a good level of trustee
understanding ahead of any
proposal to explore buy-in, buy-out
or longevity insurance options.
� Feasibility exercise – to help
compare insurance options such as
buy-ins to other de-risking options,
focussing on the most suitable
approaches for your scheme given
its membership profile, benefit
structure and investment strategy.
� seminars – we run regular seminars
on insurance de-risking options,
both for larger and smaller pension
schemes, often with guest speakers
such as clients and lawyers who
have hands-on experience.
For more infomation please visit
www.lcp.uk.com/derisking.
LCP Pensions de-risking events
our next event is planned for october 2015
Our next masterclass will provide
clear and practical advice to help you
assess potential de-risking solutions
for your defined benefit scheme.
Register your interest now.
www.lcp.uk.com/events
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LCP is a firm of financial, actuarial and business consultants, specialising in the areas of pensions, investment,
insurance and business analytics.
The LCP Update is based on our current understanding of the subject matter and relevant legislation which may change in the future.
Such changes cannot be foreseen. This document is prepared as a general guide only and should not be taken as an authoritative
statement of the subject matter. No responsibility for loss occasioned to any person acting or refraining from action as a result of any
material in this Update can be accepted by LCP.
LCP’s Pension de-risking practiceLCP have one of the largest and most experienced de-risking advisory
teams in the UK, with a clear focus on getting transactions across
the line and a strong reputation for achieving competitive pricing
and commercial terms in negotiations with insurance companies. We
have led the way in de-risking pension schemes across the spectrum
of transaction sizes, from ground-breaking solutions for some of the
UK’s largest pension schemes to our streamlined buy-in and buy-out
processes to give smaller to medium sized pension schemes access to
the market on a fixed fee basis.
Any questions? If you would like any assistance or further information on the issues raised,
please contact Clive Wellsteed or the partner who normally advises you at LCP.
Clive Wellsteed
+44 (0)20 7432 6651View a full list of our de-risking services at www.lcp.uk.com/derisking
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