Route to Buyout – Preparation is Key

MetLife Assurance Limited – A specialist in pension risk management

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Agenda

Importance of accurate data

Investment strategy pre- and post-bulk annuity transaction

Stakeholder involvement

Additional considerations for partial solutions

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Record-keeping - the Pensions Regulator view

July 2008 - consultation document stated:

“Poor record keeping can lead to significant additional costs in a number of areas, such as…buy-outs…”

“Poor data can add 5% to the cost of buy-out…” “If providers judge the records to be sufficiently poor, providers may well decline to

quote for the business at all or they may refuse to take any data risk…”

December 2008 - guidance document stated:

“[Buyout is one of the] events that we consider give rise to an urgent need to review record-keeping…When one of these events occurs, we will expect providers and trustees to give high priority to reviewing and cleansing the scheme’s data…”

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Feasibility study

Quotations to shortlist

Contracts signed

Implementationphase

Ongoing administration

Buyout roadmap

Number of steps to buyout each of which depend on data:

• Attitude to risk

• Investment strategy

• Liability reduction

• Buyout affordability

• Data provided

• Quotations issued

• Insurers short-listed

• Due diligence

• Legal negotiations

• Benefits specified

• Data risk allocated

• Premium payment

• Record migration

• Data cleansing

• Benefit recalculation

• Balance payment

• Pension payments

• Member record administration

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Why data cleanse?

To provide a better service to members– Regardless of whether buyout occurs in the future or not

To ensure a competitive quote process– Suspected bad data may result in insurers refusing to quote– Insurers may have to make assumptions leading to an inconsistent basis for

pricing

To ensure competitive pricing– Inclusion of risk premiums will increase price– Additional data may allow scheme experience to be utilised

To assist implementation and avoid expensive surprises– It has been reported that in previously transacted cases, a significant proportion

of member records had errors leading to scheme liabilities being underestimated

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Investment de-risking strategy

Equity Investment

Bond Portfolio

Typical scheme asset portfolio

Mitigates interest rate and inflation risk

LDI strategy

Mitigates interest rate, inflation and mortality

risk

LDI strategy + mortality

hedge

Removes employer covenant, interest rate,

inflation, investment and mortality risk in

part

Partial buy-in or buyout

Removes employer covenant, interest rate,

inflation, investment and mortality risk in full

Full buy-in or buyout

Possible de-risking strategies

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Advantages for buy-in or buyout

Helps protect against market movements– Many trustees who adopted a de-risking strategy are still able to secure benefits

despite market volatility

Assists in-specie asset transfers– Many insurers will accept assets as part of the premium payment providing a

saving for the trustee in transaction costs

Provides greater certainty of pricing– If the portfolio is transitioned into assets that move roughly in line with pricing

then the net price should remain fairly stable

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Stakeholder involvement

Agree objectives upfront – internal stakeholders need to start talking before the process commences to ensure their objectives are compatible

– Trustees: fundamentally the key stakeholder as typically they hold the power to select the insurance partner

– Corporate sponsor: especially if additional funding is required to facilitate the insured solution

– Trade unions: it may be necessary to involve them upfront to ensure they understand the benefit of an insurance solution to the members

Involve external stakeholders early in the process– The route to buyout in particular will involve others who are critical to the success

of the transition but may not be as motivated by the risk issues as the trustees (e.g. administrators, scheme actuaries, investment managers)

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Facilitate process and decision-making

Stakeholder training

Agree stakeholder objectives– Transaction type– Additional funding– Price tolerance

Establish sub-committee structure to undertake research and selection

Agree delegated authorities

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Additional considerations in partial solutions

Partial buyout:– Member equality– Discharging GMP liability

Partial buy-in– Reporting and monitoring processes need to be established for accounting and

administration– A strategy for residual liabilities and assets needs to be defined

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Summary

To ensure an efficient, cost effective process preparation is key

1. Undertake a data analysis and agree a data cleansing plan

2. Consider implementation of an investment de-risking strategy

3. Gain agreement on end goal from all stakeholders

4. Put in place a sub-committee structure with appropriate delegated authorities

5. Understand what needs to be considered outside of the traditional transaction process

© UFS0706-5021© 2007 METLIFE, INC.

MetLife Assurance Limited is authorised and regulated by the Financial Services Authority.Registered in England and Wales. Company number 6054422. Registered Office: 15 Bedford Street, London WC2E 9HE.