NAPF - PENSION BUY-INS AND BUY-OUTS. Harry Harper, FIA. June 2014

Transcription

1 NAPF - PENSION BUY-INS AND BUY-OUTS Harry Harper, FIA June 2014

2 Buy-ins and buy-outs Agenda Insurance market development in 2014 Bulk annuity and investments Purchasing a bulk annuity earlier Data preparation creating electronic data Medical underwriting MERCER 1

3 Pension buy-ins and buy-outs Where the UK market is headed Notional ( bn) estimated Buy-in/buyout Longevity swaps ,700bn 10bn 20bn 6,200 plans 7 insurers 2 longevity fronters Additional insurers/ reinsurers? MERCER 2

4 Pension buy-ins and buyouts UK market overview key events Highlights from 2013 Over 7bn of bulk annuity business written in 2013 alone This compares to 4.5bn written in 2012 EMI Group Pension Fund transacted for a record-breaking 1.5bn InterContinental Hotels 0.4bn Introduction of deferred premium bulk annuity products Increased interest in medically underwritten bulk annuities Aggressive pricing Looking forward 2014 The busiest year ever? 4.4bn in Q1 of 2014 (ICI 3bn L&G + 0.6bn Prudential) Other large deals very close to completion Has medical underwriting now arrived? Aggressive pricing.. but for how long? MERCER 3

5 Insurers from 2007 to 2014? AEGON AIG Budget 2014 may lead to more entrants, at smaller end of market? Aviva L&G Aviva L&G MetLife Prudential Prudential Partnership Lucida Paternoster PIC Synesis Life 1,700bn 6,200 plans Rothesay Life Just Retirement 10bn PIC Rothesay Life 7 insurers 2 longevity fronters 20bn Additional insurers/ reinsurers? MERCER 4

6 Pension buy-ins and buy-outs A buy-in is probably just one of an ongoing series of investment decisions (timing depends on project) Confidence in transaction Sell equities Finesse insurer hedging Purchase a bulk annuity Initial discussion with Trustee and Sponsor Obtain comparable initial pricing terms from insurers Negotiate and agree heads of terms Exclusive negotiations with preferred insurer and complete buy-in transaction Reduce asset risk Member data and Scheme documentation improvements Month 1 Month 2 Month 3 Month 4 Month 5 MERCER 5

7 How close are you to a buy-out and wind-up? Looking at components 125 Meeting the cost of buy-out m Actuarial Solvency deficit 0 Recovery plan plan payments payments Negotiation Negotiation of of price / good timing Investment returns returns(trigger (trigger based) based) Data Creation cleanse of electronic data Administration Correction of data savings errors Gap to fund Gap to fund MERCER 6

8 There are many ways to make this work Funding level Buy-out? 100% Buy-in Years Deferred premium buy-out Pay 70% up front and spread the rest over 5 years at LIBOR + 1.5% The only recovery plan the Company can rely on MERCER 7

9 Preparing for a bulk annuity purchase Flight-path towards a transaction Reducing Price Improving Price Accuracy Reducing Price Volatility Postcodes Marital details Death experience Electronic data creation Legal review of benefits Data audit/sample checking Member statements Interest/inflation hedging Pre-trading with the insurer Don t miss opportunities, clean data will allow temporary market opportunities to be exploited Robust electronic data is essential for an all-risks transaction Its like doing the next 30 years administration now MERCER 8

10 Pension buy-ins and buyouts Medical Underwriting a developing area of the market Currently offered by two speciality insurers plus product offerings from Legal & General and Aviva currently in development. Fair amount of media coverage recently. Individual annuity market is now 50% medically underwritten Only a modest small impact (so far) on the bulk annuity market. Specialist providers now starting to do deferred members, and will underwrite smaller members without medical underwriting (particularly on larger cases). Can gather medical information centrally, then share with insurers Relevant for larger individual pensions? MERCER 9

11 End game RISKS Liability (investment, inflation, longevity) Data/benefits risks Indemnity (defending claims) Counterparty: - Employer covenant - Scheme assets - Valuation every 3 years - PPF - Insurer regulation - Daily 1/200 valuation - FSCS MERCER 10

12 Harry Harper Strategic advice and implementation for buy-ins and buy-outs. 16 years UK pensions experience overall 10 years 100% dedicated experience of insured buy-ins and buy-outs totaling several billion First UK all risks buyout, first PPF buyout, first UK online e-auction buyout Authorised by the Financial Conduct Authority to provide trustee boards with regulated investment advice in relation to pension buy-ins and buy-outs Scheme Actuary and Fellow of Institute and Faculty of Actuaries MERCER

13 Mercer Limited is authorised and regulated by the Financial Conduct Authority Registered in England No Registered Office: 1 Tower Place West, Tower Place, London EC3R 5BU MERCER