MEDICALLY UNDERWRITTEN BULK ANNUITIES

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1 seeing retirement differently NOT FOR RETAIL CLIENTS MEDICALLY UNDERWRITTEN BULK ANNUITIES CELEBRATING CELEBRATING seeing retirement differently YEARS sin ce YEARS sin ce

2 PARTNERSHIP We re a long established insurer, specialising in medical underwriting and financial products for people with heath or lifestyle conditions. Over 20 years, we have cultivated an extensive in house medical and mortality dataset. This makes us a leading provider in understanding the effects of lifestyle and health issues on longevity. Partnership now has 5 billion of funds under management and looks after over 120,000 policies on behalf of our policyholders. Our Defined Benefit (DB) team has more than 150 years of combined experience in the de-risking area. SERVICE At Partnership we pride ourselves on our excellent reputation for customer service, which has been recognised with numerous awards, including: 02

3 CONTENTS 04 THE CASE FOR DE-RISKING MEDICALLY UNDERWRITTEN BULK ANNUITIES THE TRUSTEE JOURNEY PARTNERSHIP SETTING OURSELVES APART 03 03

4 THE CASE FOR DE-RISKING What is a buy-in and a buy-out? Trustees and corporate scheme sponsors alike have been hit hard in recent times increasing longevity, underperforming assets, rock bottom real yields, questionable covenants and increased governance all playing a part. This has driven more and more employers into closing final salary or defined benefit (DB) schemes to new members. According to the Pension Protection Fund s (PPF) Purple Book the number of active DB memberships fell to 1.8 million in 2014 a reduction of 50% since Despite membership shrinking, sponsors and trustees still retain significant risk within their legacy scheme. Unfortunately, in recent years poor funding levels have constrained many; trustees unable to derisk, reduce volatility and safeguard members benefits whilst sponsors have seen huge additional cash payments swallowed with little impact on funding. However, after years of decline a slow but steady trend is emerging of improving funding levels. The Pension Protection Fund (PPF) states that the average PPF funding level was almost 94% in early 2014 on a section 179 basis. This compares favourably with 2012 when the level was around 80%. For many schemes with improved funding levels comes opportunity. One such opportunity is the purchase of a bulk annuity policy with an insurance company via a buy-in or buy-out. This involves the scheme paying a premium to the insurer in exchange for a stream of regular income, which is designed to fund the members pensions that have been insured. DE-RISKING ACTION Buy-in Buy-out WHAT S INVOLVED? Involves de-risking a pension scheme through the purchase of a policy from an insurance company. This policy then pays a stream of regular income to the scheme which is designed to fund the members pensions that have been insured. A buy-out is an option within a buy-in policy and is often seen as a natural next step. It offers the same protection against risk as a buy-in policy. The key difference is that the responsibility for paying the pensions is transferred to the insurance company. WHAT S THE BENEFIT? The policy funds members pensions, insulating the trustees from risks including longevity, investment and inflation. The employee remains a member of the pension scheme, and the connection between the corporate sponsor, trustees and member remains. This transaction safeguards the benefits of the member, while removing the liability of providing those benefits into the future for the employer and trustee. 04

5 What are the benefits? Expense DB schemes have become very expensive for companies to fund, primarily driven by members living longer, rock bottom gilt yields and investments performing badly. Many sponsors have seen huge additional cash payments swallowed with little impact on funding. This in turn leaves trustees feeling nervous; they are keen to have a clear strategy to safeguard all future benefit promises. Volatility Tightly linked to expense is the volatility in scheme funding. Many interrelated factors in respect of both assets and liabilities mean that funding is likely to remain volatile in future years, making planning and budgeting difficult to manage. By entering into a bulk annuity policy, any shortfall in funding can be crystallised this allows trustees and sponsors to enter into funding negotiations safe in the knowledge that an agreed recovery plan will not fall short. Governance In securing the full accrued rights of their members under a buy-out, the trustees can be satisfied they have discharged fully their duties to the membership. Value for money Depending on the funding position, de-risking may be achieved with only a small additional cash contribution from the sponsor. Possibly none at all. 05

6 MEDICALLY UNDERWRITTEN BULK ANNUITIES A medically underwritten bulk annuities (MUBAs) differs from a traditional bulk annuity only in the way it assesses members longevity rather than only relying on proxies such as pension amount and postcode, it uses health and well-being information collected directly from a subset of members. An introduction Medical underwriting is an established concept, having been used in the retail annuity market for over 20 years. Indeed Partnership now pays over 120,000 annuitants having built up a strong presence in the retail annuity market. There are two core principles underlying medically underwritten bulk annuities. Firstly, a simple notion of fairness; pension plans should receive a tailored bulk annuity price which more accurately reflects their own pensioners life expectancy. Put another way: there should not be cross subsidies between pension plans. Secondly, a basic principle of insurance going back hundreds of years which is that the more information an insurer has the better it can evaluate what it is insuring and so the sharper the price it can offer. Otherwise insurers need to (rightly) include extra prudence when pricing, which emerges as profit in the future. It is for this second reason that MUBAs can be expected to be cheaper on average than traditionally priced bulk annuities. What s more if the group of members are in poor health then the premium could be substantially cheaper than a traditional policy. The highest value transaction for medically underwritten bulk annuities to date was a topslicing deal of 206 million whilst the largest deal covered over 400 pensioners in one scheme. Both of these deals were completed with Partnership. Source: Money Marketing, Source: Pensions Age, Source: Professional Pensions,

7 Until 2012, the annuity market made no use of medical underwriting. Instead insurers relied on simple proxies for how long people are going to live: typically age, gender, pension amount and postcode. Whilst these rating factors are useful as broad estimates they often fail to capture the unique circumstances of the scheme meaning many schemes pay more than they need to in order to insure their members benefits. Medical underwriting can deliver very material benefits. The Pensions Institute produced a report in 2013 entitled A healthier way to de-risk in which they stated: medically underwriting a Bulk Purchase Annuity (BPA) can offer schemes savings of about 10% much more in certain cases relative to the cost of traditional underwriting. The good news is that we are delivering on this and even surpassing it, having saved clients tens of millions of pounds to date. Top-slicing of large pension schemes means the benefits of underwriting are even more pronounced Top-slicing involves targeting the pensioners with the largest benefit entitlements for underwriting, whether that is the 20 largest pensioners in a scheme of 50 million or the 100 largest pensioners in a scheme of 2 billion. Traditional insurers approaches to pricing these members tend to be prudent as they don t utilise health and lifestyle data like we can. As a result they include an implicit safety blanket of prudence in their pricing (which is then released as extra profit for the insurer in future). We don t need to apply this prudence, which means that medical underwriting can unlock more attractive pricing. 07

8 THE TRUSTEE JOURNEY The following graphic sets out a typical journey that a trustee would experience as part of a medically underwritten bulk annuity. The important thing to note is that it s identical to that of a traditional transaction, with only one additional stage: underwriting a subset of your scheme s members. An underwriting exercise typically takes between six and ten weeks. As it runs in parallel with other items such as pricing members benefits it needn t extend overall timeframes. Members are willing participants our market experience shows that on average for transactions completed, over 80% of members will provide the insurers with the requested information. (1) The cost involved with running such an exercise are relatively low and the norm is for the winning insurer to pay these costs. STEP TIME ASSESS Help you decide if underwriting is right for you We can review your scheme profile, supply an indicative quote and underwriting illustrations. Your data doesn t have to be perfect, we just need some basic information about the number and profile of your members and benefits. PREPARE WE'LL WORK AT YOUR PACE Tailor our approach and process to your needs We will agree with you which of your members to approach for underwriting and develop a process and timeframe to support this. We will provide you with typical milestones and a timetable for schemes like yours. COLLECT DATA Collect information from scheme members We ask scheme members to complete a simple one page tick-box questionnaire. We have a great track record on returns, typically achieving a response rate in excess of 80% on our transactions. For the members with larger benefit entitlements we may 4 TO (with their permission) seek a GP 10 report and/or short tele-interview with the member. WEEKS UP TO 6 MONTHS 4 TO 6 WEEKS 2 WEEKS 2 WEEKS DATA CLEANSE Ensure member data is accurate We will provide you with support to ensure all members benefits and personal details are fully up to date. Following this exercise a final premium will be calculated on the updated data this could result in a small premium payable from you or a refund from us. ONBOARD Set up your scheme We will introduce you to one of our dedicated onboarding specialists, who'll set up your insurance policy and provide welcome packs and policy schedules to your members. We will stay in close contact with you to ensure a seamless transition. TRANSACT Agree contracts and pay premium You will need to pay us the premium and sign the contract. Following that we are on-risk for all the pension benefits payable under the terms of the contract. PRICE Provide you with a quote Our quote will specify the members that are covered and the pension benefits for those members, as well as the relevant terms and conditions and how the rest of the buy-in process will operate. We would be happy to meet in person if you like. (1) Partnership analysis August

9 An effective and streamlined process A streamlined process allows us to collect the underwriting information we need to deliver a refined premium, which better reflects the underlying membership. As a general rule only a subset of higher benefit entitlement members are approached for underwriting information. This is a two stage process: 1. An initial letter is sent from the trustees to selected members. This explains the exercise and its aims, reassures members and invites them to participate. Accompanying this letter is a short tick-box health and well-being questionnaire. Any member who ticks no to all initial questions is classified as healthy and we require no further information from them. Any member who ticks yes to one or more of the questions will be treated as impaired and qualify for a premium reduction. 2. For those impaired members with a particularly large benefit entitlement an extra layer of underwriting is undertaken. This involves either writing to the member s GP for a report or conducting a short telephone interview with a trained professional. This stage is only ever taken with the member s permission. This second step provides further granular information allowing us to further refine our pricing. We would happily share our initial underwriting form and sample member letters with you. The letters have been drafted by our Customer Journey Experts who do lots of fantastic work in our retail annuity business. The good news is that members are engaged, primarily recognising the value in improved security. As a result, the average response rate on transactions completed is over 80% (1). It is important to note that a MUBA covers all the relevant members whether they are healthy or not so that trustees receive a one-stop de-risking solution. A common misconception is that MUBAs only cover those members classed as impaired. Your members experience Your members are our priority throughout the entire process from initial contact, through on boarding to assignment of individual policies and well beyond. We expect to have a long relationship with them so we re keen to make a good impression from the first step. In the 20 years since Partnership entered the annuity market we have never lost focus on our desire to be the number one brand for service standards. This is reflected in the numerous industry awards we receive as well as in the Partnership Assurance Policyholder Survey (May 2014): 88% of respondents rate the overall service they received as excellent or good. (1) Partnership analysis August

10 PARTNERSHIP SETTING OURSELVES APART Our business Partnership is a long established insurer and specialist provider of financial solutions for people with health or lifestyle conditions. By looking at individuals health in detail, we aim to deliver an improved deal versus conventional approaches to assessing how long people will live. We have a comprehensive offering in the retirement sector providing a complete range of enhanced solutions, from clients who smoke or have minor health impairments, through to serious conditions such as cancer. Partnership is well placed in this arena as we have our own unique in depth underwriting manuals and mortality data. Combined with our in house underwriting and actuarial expertise, Partnership uses this knowledge and data to assess each individual s life expectancy rather than relying on the average. Our history Partnership Life Assurance Company Ltd ( Partnership ) was formed in October 2005, following the demutualisation of the business of the Pension Annuity Friendly Society (PAFS). PAFS was established in 1995 and was the first impaired annuity provider in the UK. Partnership Assurance Group plc (the ultimate parent company of Partnership) was floated on the London Stock Exchange in As a result we are now a member of the FTSE All Share Index. Our defined benefit de-risking experience and credentials Partnership s bulk annuity proposition was launched in The Partnership core de-risking team has well over 150 years of combined experience in the de-risking area, having delivered well over 500 transactions of all shape and sizes. Expertise is offered in each area of de-risking activity including actuarial, finance, administration, legal and technical. Since completing the first two underwritten bulk annuity transactions in the UK market in 2012, we have seen this market go from strength to strength. Throughout, we have remained focused on our goal of being consistently seen as the market leader in this area. We were the first to enter the Medically Underwritten Bulk Annuity (MUBA) market in We have undertaken over 60 medical underwriting processes, covering 3,000 members. We have achieved an average member response rate in excess of 80% on deals completed (1). We have written over 400 million of MUBA business across 25 transactions, including: The largest MUBA to date - a 206 million transaction with the FTSE-100 firm Taylor Wimpey in December The largest full scheme MUBA to date - a 42 million transaction with the Kuwait Petroleum Services Company Limited Pension Scheme in May We wrote the first whole of market MUBA. We have completed transactions varying from less than 10 members to over 400 members. (1) Partnership analysis August

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12 OUR TEAM Our Bulk Annuities team has more than 150 years of combined experience in the de-risking area, having delivered well over 500 bulk annuity transactions of all shapes and sizes. We were the first to enter the medically underwritten bulk annuity market and have wide ranging credentials in this market. Our contact details and website address are below should you like to find out more about our medically underwritten bulk annuity (MUBA) offering or have an informal chat with one of the team. Costas Yiasoumi Director, Defined Benefit Solutions Andy Morley Head of Bulk Annuity Origination Frankie Borrell Business Manager Martin Parker Business Manager Graeme Taylor Business Manager Regent House, 1-3 Queensway, Redhill, Surrey RH1 1QT Partnership is a trading style of the Partnership group of Companies, which includes; Partnership Life Assurance Company Limited (registered in England and Wales No ), and Partnership Home Loans Limited (registered in England and Wales No ). Partnership Life Assurance Company Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Partnership Home Loans Limited is authorised and regulated by the Financial Conduct Authority. The registered office for both companies is 5th Floor, 110 Bishopsgate, London EC2N 4AY. DB