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1 JANUARY/FEBRUARY 2010 IN ASSOCIATION WITH CONTENTS The right tools iii Tackling pension scheme risks in the Twenty Tens vii Calculating the cost of buyout viii Unique needs lead to bespoke solutions ix The role of key stakeholders in the bulk annuity process x Expert panel debate xi Directory xiii DE-RISKING TOOL KIT

2 At Lucida we specialise in just one thing helping trustees and employers reduce the risks inherent in running their defined benefit scheme, whilst protecting the interests of scheme members. But seldom has one thing involved such a wide variety of technical, communication and administrative challenges. That s why when building a new company to tackle this task, we hand-picked a team of proven experts that will work closely with you to design and deliver the optimum solution for your particular needs. Established faces. New thinking. +44 (0) For pension scheme trustees, scheme managers and employers. Lucida is an insurance company focussed on the annuity and longevity risk business, including the defined benefit pension buy-out market and the market for bulk annuities. Lucida plc is authorised and regulated by the Financial Services Authority.

3 TRUSTEE GUIDE TO BUYOUT AND DE-RISKING istockphoto.com/wragg THE RIGHT TOOLS Buyout, buy-in, longevity swaps, liability driven investment, enhanced transfer values, data cleansing the variety of strategies and wealth of jargon that can be grouped under the heading of derisking is quite bewildering. When Engaged Investor last investigated de-risking at the beginning of 2009, it focused almost exclusively on buyout and buy-in deals. We were writing at the end of a bumper year for bulk annuities (the collective term for buyout and buy-in), with 7.8bn of deals having been completed during 2008 that compared to a modest 2.9bn in While, according to Hymans Robertson, a credible 4bn of buyout and buy-in deals were completed during 2009, the landscape for full-scale buyouts in particular changed substantially. The extreme financial stresses and strains of the early part of last year meant that the costly business of full buyout stretched beyond the reach of many schemes. Buyout requires a scheme to be fully funded and as asset values headed ever downwards, combined with employers becoming increasingly unwilling or unable to contribute substantial additional finance, for many schemes the goal of buyout seemed as distant as ever. Charlie Finch, a partner in LCP s buyout practice, said: After the explosive growth in pension buyouts in 2008, the financial crisis slammed on the brakes in early Insurers and pension schemes took a step back as they waited to see the impact the crisis would have. Trustees are keen to reduce the key risks to their schemes, from the cost of members living longer to protecting their assets against financial crises. What techniques are available to them? Pamela Atherton investigates However, risk most certainly didn t go away during 2009 if anything it acquired an even greater significance to pension schemes. The broad range of options available to help schemes reduce their risk (or de-risk ) broadened out, with new solutions such as longevity swaps becoming available, and existing strategies such as liability driven investment (LDI) continuing to evolve to support schemes. With choice comes potential confusion: is each strategy a discrete approach to de-risking, or can they be viewed as steps on the path towards a final goal of full scheme buyout? Read on! BUYOUT AND BUY-IN The principal options for scheme sponsors wishing to de-risk their schemes remain buyouts, buyins, or increasingly longevity swap contracts. The buyout market is a term used to THE ENGAGED INVESTOR TEAM Please prefix all telephone numbers with +44 (0) EDITOR & ASSOCIATE PUBLISHER Bob Campion 3485 EXECUTIVE EDITOR Maggie Williams 3487 ASSISTANT EDITOR Alastair O Dell 3458 HEAD OF SALES Stuart Hall 3096 DEPUTY ADVERTISING MANAGER Lucy Thomas 3435 SALES EXECUTIVE Dionne Murray 3412 PRODUCTION DESIGNER Evelina Beckers 3446 SENIOR PRODUCTION CONTROLLER Gareth Kime 3475 PRODUCTION CONTROLLER Billie Goodger 3446 ADVISORY PANEL April Alexander and Terry Clayworth, The Pensions Regulator Jonathan Bull, OPDU Peter Davis, trustee, Prudential Penny Green, PMI and Saul Trustees Bill McClory, trustee, BT Wayne Phelan, PS Independent Trustees Tom Powdrill, PIRC Emma Watkins, MetLife WEB: ADDRESS: 30 Cannon Street, London EC4M 6YJ, UK From June 08, Engaged Investor distributes to 10,100 trustees and pension professionals. SOURCE: Circulation Department, Newsquest Specialist Media Ltd PRINTED BY: The Manson Group, Reynolds House, 8 Porters Wood, Valley Road Industrial Estate, St Albans, Hertfordshire, AL3 6PZ NEWSQUEST SPECIALIST MEDIA MANAGING DIRECTOR Tim Whitehouse 3469 PROJECT MANAGER, MARKETING & CIRCULATION Stuart Kelly 3409 GROUP PRODUCTION MANAGER Tricia McBride 3425 Engaged Investor is published by Newsquest Specialist Media Ltd a Gannett company. Newsquest Specialist Media Ltd is a member of the PPA ENGAGED INVESTOR JANUARY/FEBRUARY 2010 iii

4 TRUSTEE GUIDE TO BUYOUT AND DE-RISKING istockphoto.com/chrishepbun encompass the range of solutions available to transfer risk from a pension plan to another institution, usually an FSA-regulated insurance company, via a bulk annuity contract (ie a contract that will pay all members pensions as they become due). A full buyout is generally followed by the wind-up of the pension plan. A buy-in, LIABILITY-DRIVEN INVESTMENT Any discussion on de-risking wouldn t be complete without a mention of Liability Driven Investment. However, it is a very different type of strategy from buyout, buy-in or longevity swaps. It can encompass a variety of different approaches, but its overall goal is ensure that the investments made by a pension scheme are appropriate to match their liabilities (ie the pensions that they have to pay). Andrew Connell head of LDI of Schroders says: There has been a move from asset-based to a funding-level focus for schemes. Liabilities are the new benchmark. An LDI strategy will therefore be tailored to each individual schemes requirements in particular the age profile of its members and the trustees and by contrast, involves a scheme purchasing a bulk annuity with an insurance company to match some of the scheme s liabilities, thereby reducing risk. Crucially, other liabilities remain in the pension plan and the trustees retain responsibility for them. Buy-ins are often used to cover pensioner liabilities, but can also be used for other clearly defined groups, such as deferred members. The most active businesses in this field in 2009 were Legal & General and Pension Insurance Corporation, with Aviva, Aegon, Metlife and AIG taking smaller shares of the market. sponsor s appetite for risk. Dividing up investments so that there are some low-risk elements (typically gilts) to provide funds to cover current pensions and then some more ambitious investments that generally involve the use of derivatives such as swaps and equity futures contracts, is a common approach. For the most part, LDI strategies fared well during the turmoil of 2009, and Connell says he is seeing greater interest from trustees in committing resources to LDI but they need to make sure that the timing is right. It s important for trustees to think about their structure now, appoint a manager and put that manager on the path towards executing an LDI strategy as soon as market opportunities are there, he says. Good quality data that eliminates duplicate records is vital to any buyout or buy-in transaction LONGEVITY SWAPS More recently, pension schemes, such as those of RSA Insurance and Babcock International, have signed deals with investment banks to protect against the risk of their scheme members living longer than expected through the use of longevity swaps. These enable a pension scheme to transfer longevity risk to a third party while retaining control of their assets. That means if members live longer than expected after retirement, the scheme won t suffer as a result. The two main types of longevity swap are bespoke (where the terms of the deal are unique to the scheme) and index-based. When a longevity swap is set up, trustees still retain responsibility for the overall running of the scheme. This solution wouldn t eliminate other risks to the scheme either for example, it wouldn t have protected against the ravages of the stock market crashes last year. Approximately 20bn of these deals are expected to be completed over the next two years. However, consultant Towers Watson estimate that the current market capacity of the reinsurance companies, which ultimately assume this risk, is just 10bn to 20bn, so there is a limit to the size of this market over the long term unless new sources of capital are found. Legal & General is considering entering the longevity swap market in the first quarter of 2010, as are a number of specialist longevity and hedge fund managers. ENHANCED TRANSFER VALUES An enhanced transfer value (ETV) exercise involves offering selected (usually deferred) members the chance to transfer their funds out of the scheme, at a price that gives the member a better deal than a standard transfer might provide but that will still cost the scheme less than it would to pay the member s pension for an uncertain length of time into retirement. Identifying the most suitable members for an ETV exercise and getting the balance right between benefit to the members and value to the scheme are at the heart of getting an ETV exercise correct. However, if carried out effectively it can reduce the cost of a buy-in or buyout by reducing the number of members whose pensions need to be bought out. It can therefore be a useful precursor to a buy-in or buyout and can also work well as a de-risking solution on its own. DATA CLEANSING Good quality data that eliminates duplicate records, tracks down deferred members and includes mortality screening to identify deceased pensioners is vital to any buyout or buy-in transaction. If an insurer doesn t know exactly what it is insuring, it will be very difficult to establish an appropriate price. Some buyout providers offer data cleansing as part of the service that they provide but it can also be carried out as a de-risking activity in isolation. Even if a scheme isn t considering buyout, having clean data reduces other risks, such as identity fraud and over-payment of pensions. The Pensions Regulator has recently put great emphasis on the importance of good record-keeping and data cleansing is a cornerstone of that. GETTING THE RIGHT FIT So what types of scheme are most suited to the various forms of derisking on offer? Some types of de-risking activity such as an ETV exercise or data cleaning can easily be carried out in isolation but both of these are also ideal early steps on the path towards a buyout or buy-in. The Pensions Regulator has been very outspoken recently about ETVs, and whether they represent good value for members. While the industry has strongly opposed the Regulator s comments, it is essential that trustees understand exactly what the benefits are to iv JANUARY/FEBRUARY ENGAGED INVESTOR

5 TRUSTEE GUIDE TO BUYOUT AND DE-RISKING CASE STUDY EMAP Rosemary Kennell, of Capita ATL Trustees Ltd, was closely involved, as the independent trustee, with the full buyout of the EMAP final salary pension scheme in 2007 by Paternoster. Kennell says: The EMAP deal was the first all-risks buyout and was notable because the insurer took on the risk before all the data had been checked. EMAP had to pay an extra premium on top of the full buyout cost both the member and the scheme before carrying out this type of exercise. Longevity swaps are relatively new to the pensions industry, and can form a precursor to a buy-in or to pay for this, but it speeded up the transaction considerably and enabled EMAP to get the pension scheme sorted before it sold off various parts of the business. The buyout cost was some 180m which, with the benefit of hindsight, appears a good deal. The buyout market at the beginning of 2007 was competitive as new entrants to the market were bidding against each buyout. However, while many consultants have included the cost of longevity swaps completed in 2009 alongside those for buy-ins and buyouts, they are a very different type of strategy they do other for their first tranche of business. Kennell says: EMAP wanted to buy out the scheme because it did not want the scheme to get in the way of the restructuring. My advice to trustees is that if you have an employer who is willing to fund a full buyout, you should seize the opportunity. That said, it is a big project requiring input from lots of different firms of advisers. not involve handing over any assets to an insurance company, or removing any responsibilities from the trustees. It s also worth noting that at present not all buyout providers are happy to take on longevity swaps set up with a rival. Generally speaking, it is the more mature schemes, where the scheme sponsor has a strong wish to off load the pension liabilities which are most likely to use buyouts. But because of the cost of a full buyout, which in most cases exceeds the prevailing scheme funding costs (and therefore requires a top up from the sponsor), buying in a section of the membership is now often the preferred method. Kenneth Donaldson, director of actuarial services at Capita says: Schemes are looking to take out various sections of their membership as their pocket can afford. By phasing in such buy-ins, schemes can spread the cost over time. Given that buyout is unlikely to be an option for many schemes at present, the sponsor and trustees need to approach de-risking with extreme care in order to avoid unnecessary waste of time and EXPERT VIEW Right technique, right time Fraser Smart explains that implementing the correct de-risking approaches at the appropriate time is vital to success Much of the recent interest in de-risking has been triggered by defined benefit schemes entering the 'end game', as they close to further accrual. However, it s easy for companies to embark on a risk transfer process which is not ideal for trustees and members. Key roles in deciding a derisking strategy include actuaries and investment consultants as the scheme s liabilities and assets need to be assessed and there is an important need for consultation alongside that, particularly in supporting the trustees. Members also need to be well informed. For example, an enhanced transfer value (ETV) strategy must have appropriate communications around it. The Pensions Regulator has bared its teeth on this, and some examples of industry practice have been shameful. ETV exercises must be done properly and members must understand their mechanics to give informed consent. The longer term risk of not doing this properly could be a class action, with groups of members acting against a company for not explaining the implications. This would simply exchange one set of known risks for other unknown ones. Scheme-specific factors Determining what de-risking activities to carry out, and when, depend on a number of factors specific to the scheme itself, such as: Appropriateness de-risking strategies, including ETVs, can benefit both trustees and sponsors. For example, a big scheme attached to a small company gives a higher risk the company will be unable to pay benefits in adverse market conditions. An ETV exercise to reduce the size of the scheme might in this example have a commonality of interest for sponsor, trustees and members since it would give members the choice of taking their benefits now and increase security for the remainder. Timing there's an intrinsic value in each derisking strategy and that changes with time. For example, in March 2008 the cost of buying out benefits was significantly more attractive than a year later. Value to the sponsor the value to the sponsor is as important as the timing. For example, one of our clients recently decided that it would work out cheaper in the long run to retain longevity risk in their scheme than to do longevity swaps. In this case the sponsor is large enough relative to the scheme to be able to take such risks. Education is needed around as many techniques as possible so that there is no information gap when the timing is right to transact. Factors such as size, sponsor structure, maturity, membership, mix even regional location can also make a difference to a de-risking strategy. So there is no one size fits all solution. Making the right decision Many schemes won t be well enough funded to take advantage when the next sweet spot for full buyout occurs. Aiming to get funding levels up is one way of ensuring that schemes have the best chance of making the right de-risking moves. Some schemes may be able to afford to take on some extra, medium term, risk to help them get to their end game more quickly we have developed a service to help trustees do that. Finally, don t forget some of the residual risks remaining after using de-risking strategies. For example, I have seen buy-ins where assets have been sold across the portfolio, but the scheme has been left with the long tail risk of active members living longer, and with the same asset mix to meet those pension promises. These second order risks can still result in funding volatility if not carefully managed and will require ongoing advice. Fraser Smart Buck Consultants ENGAGED INVESTOR JANUARY/FEBRUARY 2010 v

6 TRUSTEE GUIDE TO BUYOUT AND DE-RISKING istockphoto.com/ileximage cost. Unpicking existing buy-in agreements and even longevity swaps many years after the event can be fraught with difficulties. Investment volatility, difficulty in valuing illiquid assets, comparing and contrasting the insurance premiums quoted and counterparty risk are just some of the issues to be considered. To ensure a smooth process, consultants recommend that all the different advisers (investment consultants, actuaries, covenant advisers, lawyers and possibly the scheme auditors) are involved from an early stage to prevent duplication of effort. There should be a process of due diligence on the provider and it should be made clear which adviser is being appointed to do what and whether there are any limitations on their advice, such as liability caps. Trustees need to be prepared to challenge the assumptions and the advice they are given, particularly the amount of risk which will be removed from the scheme. Securing some collateral, surrender value, or other security package against the risk of the insurer failing is also an essential consideration. The relative strength of the insurer versus the sponsor needs to be considered. The covenant of the sponsor, under the supervision of the Regulator and with the safety net of the Pension Protection Fund, has to be weighed against the strength of the insurer, regulated by the FSA and backed by the Financial Services Compensation Scheme in the event of default. Partially de-risking may be a good idea where the sponsor can only afford to buy in a section of the membership, such as pensioners over 65, 70 or 80. However, lawyers warn it is important to ensure that the trustees have not favoured one set of members over another. Buy-ins should also be approached with care if the ultimate goal is full buyout. Trustees need to know that if the insurer s credit rating changed in 20 or 50 years time, they can extricate themselves from the contract. Capita s Donaldson said: If entering into a buy-in contract, make sure the divorce terms are absolutely specified. Trustees must be very careful of the exit terms and not accept woolly wording regarding costs such as reasonable, to be agreed or equitable. Consultants say that the most difficult contracts to unravel are those which were not properly documented, negotiated or had unclean data in the first place. But Aon principal Paul McGlone said that longevity swaps can be the biggest problem because it is a contract specifically on your members and it is difficult to ascertain its market RELATED LINKS Visit our website to read more full-length trustee supplements Trustee guide to governance Trustee guide to defined contribution EXPERT VIEW Mind the Gap John Belgrove examines how 2009 s crises affected the value of trustees assets and their risk levels Pension issues have been on the critical list for most UK companies and the arrival of a New Year does not alter the outlook. However, a prolonged period of intensive care for these giant nest eggs is anticipated to maximise the chances of delivering the promised benefits that are already accrued for millions of hard working individuals. Despite all the market turbulence, a look back on 2009 for a buy-and-hold investor reveals some tantalising numbers UK equities up 30 per cent, global equities up 16 per cent and UK gilts down 1 per cent. That sounds like some good news at last for the many equity heavy pension schemes that were so badly hurt in However, a glance at the chart right (http://www.hewitt.com/pensionrisktracker) estimates the scale of the problem faced by the FTSE 350 schemes. Here we approximate the progress over time of assets separately from liabilities. Further, we estimate liabilities on two measures one an accounting basis, the other a discontinuance basis. Either way, one message is clear: the situation isn't getting any easier despite ultimately favourable 2009 market returns. The bigger the gap, the harder it becomes to close. Remedies will require sustained focus and delivery and crucially no more big set backs. In Hewitt's 2009 Global Risk Survey two clear themes emerged from respondents volume and velocity. The sheer speed at which events can unfold and the vast quantity of data and decisions to digest, can place intolerable strain on many pension governance structures. Just as was the case for 2008, so it was in 2009 that those pension schemes emerging the strongest have raised their game in terms of bringing on board more expertise and adopting a more dynamic decision making framework. Continuous assessment of risk and reward should now be integral rather than aspirational. Taking account of prevailing market conditions and a willingness to act faster on more opportunities or to delegate decisions to full time professionals are trends that are likely to grow and are being reflected in survey results. The overwhelming theme of our 2009 survey was one of changes changes in benefits, changes in asset mixes, changes in governance and changes in monitoring pension risks. Risk management solutions look set to dominate as defined benefit pension provision (in the private sector at least) gets steadily dismantled. John Belgrove Hewitt vi JANUARY/FEBRUARY ENGAGED INVESTOR

7 EXPERT VIEW Tackling pension scheme risks in the Twenty Tens John Smitherman-Cairns casts a forward glance into 2010 and beyond to identify the de-risking options available to trustees and their schemes 2010 looks set to be a pivotal year in the growth of the pension buy-out and risk reduction market. On the supply side, the concluding years of the last decade have seen rapid evolution in the market. New entrants arrived including established insurers, new insurers, reinsurers and investment banks. The market also saw departures, particularly of those offering noninsured approaches. In addition there has been considerable product innovation, including pension buy-in and partial buy-in, longevityonly insurance and most recently longevity swaps. Overall these developments have served to increase and invigorate the supply side of the risk reduction market, both in terms of products and the organisations providing them. Turning to the demand side, the changing fortunes of the economy over the last two years is also serving to drive market growth. There is no doubt that the global financial crisis and the recession it spawned has put risk reduction firmly in the minds of those running pension schemes. And as economic conditions have started to improve albeit slowly risk reduction for pension schemes has become more affordable. All this adds up to this new decade looking set to be the biggest and fastest growing yet for the risk reduction marketplace. A vibrant, healthy and competitive risk reduction market means that where DB schemes have been closed, existing scheme members, their trustees and sponsoring employers are all able to move to a more secure, controlled and lower risk context. Identifying the risks So if 2010 is the year for trustees to take a serious look at whether to de-risk their pension scheme, what are the risks they need to consider? They are in fact many, varied and often interlinked, making the first essential step one of risk assessment and analysis: Perhaps the most fundamental risk is that of the employer sponsoring the scheme no longer being able to support it. As the recession takes its toll, sadly this is a risk that increasing numbers of trustees must steel themselves to face. The more common risks, faced by all trustees to one degree or another, and those very much in the spotlight recently include the risks that market and investment volatility leave a black hole in the scheme, and that falling interest rates, higher than expected inflation or ongoing improvement in longevity push up the costs the scheme has to meet. Whilst these are the high profile risks hitting newspaper headlines, there are additional risks that must be taken just as seriously. These include the operational risks associated with running the scheme, the legal risk that the regulatory environment changes to the detriment of the scheme, and finally counterparty risk the risk that one or more of the partners in the management of the scheme fails. More so than ever in these rapidly changing times, it is crucial that trustees allocate the right amount of time and energy to a full and proper risk assessment. Once they understand the risks that they are running, then they can start to develop a risk management plan to address them. Developing such a plan may feel daunting. This is not at all surprising given the technically challenging nature of these issues and the state of flux in which most of them exist. The good news is that organisations like the Pensions Regulator and the Association of British Insurers have produced very helpful education material to assist trustees, and of course pension scheme advisers and buyout companies are also more than happy to provide support. A range of options As mentioned earlier, there is a wide and growing range of de-risking options available to trustees now a highly useful and continually improving tool kit to turn to when seeking to address the risks inherent in running a defined benefit pension scheme. From universally useful data cleansing exercises, to more bespoke liability driven investment strategies, from insuring against longevity risk, to taking the first steps towards a full buy out of the scheme. The latest tool to be added to the de-risking kit is the longevity swap. Although these have been carried out for years in the insurer to reinsurer world, last year saw the first use of a longevity swap to reduce risk in a pension scheme. Purchasing longevity swaps alongside interest rate and inflation hedging achieves a DIY buy-in strategy. However, trustees need to be aware of the significant operational risk and management costs that will be added by such an approach and the possible gaps that can be left in coverage such as the longevity of dependants. Many schemes may find the simpler approach of a partial buy-in more attractive. A partial buy-in can address all the elements of risk for a given slice of the scheme membership and benefits, potentially giving trustees and the sponsoring employer greater reduction in total risk without incurring the additional complexity of a DIY solution. As we move into the so-called twenty tens, there is no question that risk reduction is firmly on the pension trustee agenda. For many trustees, the need to take action to reduce risk is urgent and imperative. And almost all trustees should consider conducting a proper review of the risks faced by their scheme if they have not done so recently. Although these challenges can seem daunting, the good news is there are plenty of places to turn for help and there is a growing and vibrant market ready and willing to provide a wide variety of solutions. Lucida plc is authorised and regulated by the Financial Services Authority John Smitherman-Cairns, Corporate Development Director, Lucida ENGAGED INVESTOR JANUARY/FEBRUARY 2010 vii

8 EXPERT VIEW Calculating the cost of buyout How can trustees keep the cost of buyout as low as possible and how are those costs calculated? UK insurers generally price their bulk annuity business by reference to corporate bond yields, although some use the swaps curve. The spread of corporate bond over gilt yields includes expected default rates and the so called illiquidity premium. The former needs to be deducted from the gross yield for buyout pricing. But insurers take credit wholly or partially for the illiquidity premium as they expect to hold a matching bond portfolio which they do not expect to need to sell. It is for this reason that buyout pricing typically reflects yields slightly in excess of the gilts curve. So for many trustees, the pricing decision is one relative to the gilts curve and a starting point is to obtain indicative quotes from a couple of insurers. Differences between the price and the gilts curve are likely to reflect insurers views on the illiquidity premium and differing views (compared with those of the trustees) on longevity and other demographic factors. It will also reflect the quality of the data provided to the insurers. Insurers may not be able to continue to take credit for the illiquidity premium under Solvency II and uncertainty over the exact requirements will remain for some time yet. But there is the possibility of higher prices in years to come. Seven Key Steps There are seven key steps to keeping the cost of buyout as low as possible: 1. Ensuring membership data is fit for purpose. Data held for the day-to-day running of a pension scheme will rarely be sufficient to obtain the best buyout quotes. For example, up to date accurate data on contingent spouses is rarely maintained for all members. This data can be obtained as and when it is needed. For insurance companies, the absence of such data means they have to make assumptions in the buyout quote which are likely to result in higher pricing. We advocate a data analytics approach, whereby existing data is assessed against the purpose of obtaining a buyout quote. The quality of data is then improved only to the extent it is likely to result in lower pricing. 2. Clarifying discretionary practices. Practical processes adopted for day to day administration often differ from the precise requirements of the rules of a scheme and trustees will need to determine how these hidden discretions are to be treated, particularly as in many schemes, ceasing these practices will lead to a reduction in the buyout cost. If trustees have undertaken due diligence on their administration processes ahead of receiving quotations, it can provide a stronger negotiating position with the preferred buyout provider. 3. Presenting mortality analysis and likely longevity improvements effectively. If trustees expect longevity to be less than insurers, they will have to take the time to share their mortality analysis with those insurers and ensure the analysis stands up to scrutiny. The analysis should cover past mortality experience and other relevant factors, such as pensioners' postcodes. The trustees will wish to engage with insurance companies on the separate issues of base mortality tables and allowance for future improvements in longevity. 4. Monitoring buyout pricing. Insurance companies, whilst following similar pricing principles, will not all react to market changes in the same way. For example, some insurers will price their bulk annuity business relative to the swaps rather than the gilts curve. To ensure windows of opportunity are identified and capable of being acted upon, monitoring buyout pricing relative to the pension scheme's assets is essential. Three key inputs are required for effective monitoring: liability cash flows; scheme asset details; and up to date buyout pricing from the providers. 5. Establishing the governance required to act swiftly. An inherent challenge of trusteeship is establishing a governance structure that will allow decisions to be taken when windows of opportunity occur as these are often shortlived. Decisions are typically collaborative requiring agreement by both company and trustees so it helps if both parties consider the types of providers and products which meet their needs in advance. This will cut down on the time it takes to implement the de-risking strategy once the conditions are right. Many trustees, and indeed companies, regret not being able to act more quickly in this area. Far fewer have taken decisions in haste. 6. Responding appropriately to company requests for alternatives to buyout. In the current climate, many schemes could look to buyout pensioner liabilities. In contrast, buying out of active and deferred liabilities is often not a feasible option and companies are therefore looking at more imaginative ways of settling these obligations. The most publicised approaches currently being pursued are to close the scheme to future accruals for active members and to offer enhanced transfer values (ETVs) to deferred members. But there are others, such as foregoing pension increases and early retirement exercises. The trustees will need to ensure they comply with their legal duties and that the interests of all members are protected. They should not, however, stand in the the way of well considered and conceived options to members. Such options are increasingly becoming a legitimate part of a wider plan to make buyout affordable. 7. Investing the scheme assets with buyout in mind. In the main, trustees looking to match their assets to buyout pricing will move the majority of these assets into corporate and government bonds. Whilst this is entirely proper for a fully funded scheme, it will lock in any deficit in any scheme with a significant deficit on a buyout basis. Here trustees will need to consider how they can expect to achieve a pick-up in return and over what timeframe it will be required. Clearly the cost of buyout will be reduced if additional returns can be generated but these come at a price; a risk of underperformance which would result in a higher buyout cost. Neville McKay Towers Watson viii JANUARY/FEBRUARY ENGAGED INVESTOR

9 EXPERT VIEW Unique needs lead to bespoke solutions Innovation will be our key theme during 2010 for the defined benefit pensions de-risking market, as trustees seek tailored solutions. The world of defined benefit pension de-risking has experienced fundamental change in the last three years, but there is plenty more still to come as innovation tops the agenda. First there was the shift from a buyout only environment (to support full scheme wind-ups), to a market where trustees used bulk annuity buy-ins as an insurance policy for schemes with solvent sponsoring employers then saw some movement towards a new breed of alternative solutions, especially for larger schemes looking at innovative ways to partially de-risk in a more tailored approach. This included Longevity Swaps, DIY buy-ins and increased Enhanced Transfer Value activity. For many, this change in focus was driven by both affordability and timing due to the rapidly changing economic climate, coupled with increasingly complex legislative demands on trustees and corporate financial reporting. Scheme funding was hit hard. As was the ability of most sponsors to provide the cash injections required to either stabilise the funding position, or to fund the cost of any derisking activity with insurers. Consequently, many schemes simply could not afford to implement large scale de-risking solutions, despite an increased desire. As the UK slowly moves out of recession, more schemes may find themselves in a position to entertain derisking again, but it will be a case of: How much risk do you want to remove? What are you prepared to pay? And when can you transact? One of the key challenges for trustees will be ensuring any partial de-risking solutions fit with their longer term strategy and do not inhibit the potential for further de-risking in the future. For example there are still some question marks over the effectiveness of Longevity Swaps due to the complexities involved in both setting up and potentially unwinding these in the future to enable full de-risking. Phased payments Availability of finances will always be key. It may be that any additional capital injections from sponsors will need to be staggered, to finely balance the financial recovery of the corporate, while also enhancing pension scheme support. Therefore, providers such as Prudential must help develop tailored derisking solutions that enable phased funding yet deliver a material level of de-risking from the start. A key example of this may apply to merger and acquisition (M&A) activity. As the economy begins to turn, there is growing speculation of M&A activity across many industries, yet pension fund deficits can prove to be a substantial stumbling block for such transactions. There is scope to develop appropriate pension de-risking solutions that ensure security of pension fund members, but do not damage M&A activity due to affordability. Entering an agreement that secures future pension liabilities in a way that can be off-set via a phased payment structure could help such M&A activity proceed. This approach could aid corporate activity without the burden of an immediate large scale outlay, or the issue of a huge pension deficit sitting on the balance sheet. Scheme Assets Another challenge trustees face when derisking is to hold scheme assets that can be easily traded on the market, or passed to a provider via in-specie transfer. It can be difficult to trade bulk movements in assets without incurring a loss and liquidity can also have an impact. Providers need to deliver ways of taking on a broader range of assets in payment to support schemes, so that transactions can be implemented when the timing is right for the scheme. This could help reduce timescales and costs involved in asset transfer, enabling a more immediate solution. Predicting Mortality While each set of trustees understands their own membership, providers such as Prudential have vast experience in assessing mortality due to the volume of pensioner customers we support overall. However, as a result of this wider experience, mortality assumptions of providers have sometimes been perceived for trustees and corporate sponsors as overly cautious and have therefore provided a barrier to agreeing to transact. This means there is potential to develop profit sharing arrangements, based on actual mortality experience, which would help alleviate any concerns of differences in mortality assumptions used in pricing models. Investment returns Providers also need to support trustees in seeking higher yields from their pension scheme assets without exposing the scheme to undue risks. For example, annuities are typically matched via corporate bonds, which offer a degree of security against liabilities but are unlikely to provide a substantial long term return once the appropriate margins have been removed from these yields. For schemes with a younger pensioner population (and potentially a longer mortality term) this could have a serious impact on funding. Such schemes may be able to achieve a higher yield without introducing undue risks or overly complex investment solutions. This could be achieved via bespoke buy-ins that enable a more gradual shift to appropriate asset holdings, allowing the scheme to benefit from potentially higheryielding investments in the meantime. There is certainly a lot for providers, trustees, sponsors and advisers to consider. Martyn Phillips, Prudential ENGAGED INVESTOR JANUARY/FEBRUARY 2010 ix

10 EXPERT VIEW The role of key stakeholders in the bulk annuity process Emma Watkins explains how each of the main participants in a buyout fits into the process and how they can work effectively together Whether considering a buy-in or a buyout, one of the greatest challenges is ensuring agreement between the potentially large number of stakeholders involved. These can range from external service providers such as fund managers and administrators to internal parties such as trustees and sponsoring employers. Each of the key stakeholders involved can play an important role in the process as outlined below: 1. Trustees The trustees are the key stakeholder in the risk transfer process as they are usually the party who will select the insurer with whom the pension benefits are to be secured. In preparation of the transaction, trustees can carry out a thorough audit of scheme data to ensure member records are accurate and up-to-date. Where issues exist, data cleansing should be considered prior to approaching the market for quotations. It may also be useful to update the assumptions used to estimate the scheme s liabilities, particularly the mortality assumption if it has not been reviewed for some time. With good quality scheme data and an accurate valuation of the scheme s assets and liabilities, the trustees can make an informed decision about whether to proceed. In terms of the governance surrounding the actual process, it may be appropriate for the trustees to establish a sub-committee to undertake the research and initial selection, particularly if there is a large trustee board. 2. Sponsoring Employer Whether it is the trustees or the employer driving the process, the employer s view on buy-in or buyout as a risk management tool is critical. With a buy-in, the trustees retain the employer covenant backing the promised benefits. Consequently, the employer may want reassurance on the insurer s financial strength and security. In the case of a buyout, the employer may be funding any shortfall between the value of the assets and liabilities. The support of the employer may be dependent on the reduction or removal of the volatility experienced as a result of reporting the pension scheme deficit on the company s balance sheet. Thus, it is important that the employer and trustees agree in advance which solution is appropriate for their circumstances in order to work in partnership to reach the stated objective in a timely manner. 3. Advisers External stakeholders are also critical to the success of the transition, but may not be as motivated by the risk issues as the trustees and as such are best involved from an early stage. Asset structure is a key part of any bulk annuity transaction. Investment managers can play an important role in assisting trustees in this area. If practicable, the pension scheme assets should be transitioned into a form that an insurer will accept as part of an in-specie transfer to optimise cost effectiveness and efficiency. In the case of a partial buy-in or buyout, it is equally as important to identify in advance the assets that will remain and the appropriate investment strategy to support the remaining liabilities. Third party administrators can also play a large part, from providing the data extract on which the insurer will provide their quotation to liaising with the insurer through data cleansing and ongoing administration. One method of achieving consensus efficiently is to establish a working group which includes representation from the scheme, the company and other relevant stakeholders, such as advisers and union groups. Any sub-group of trustees would need to have agreed terms of reference under which they can act with appropriate delegated authority in order to avoid having to consult the full trustee board on matters of minutiae. Having established a working group to manage the process and agreed the objectives, all parties should then ensure that a number of other important steps are taken prior to any transaction including a full audit of scheme records, a formal feasibility study, a competitive quotation process, and due diligence of the short-listed insurance companies. Consideration should also be given to when legal documents should be reviewed and the process for any proposed transfer of scheme assets in part or full payment of the insurance premium. Emma Watkins, Head of Relationship Management at MetLife Assurance x JANUARY/FEBRUARY ENGAGED INVESTOR

11 TRUSTEE GUIDE TO BUYOUT AND DE-RISKING Buyout and de-risking: Q&A We ask industry experts for their views on developments in de-risking THE QUESTIONS A. How have trustees de-risking choices changed over the last year? B. Trustees may want to de-risk their scheme but not be sure where to start. What approach would you recommend? C. Is it important for trustees to have a de-risking roadmap, or is addressing specific risks in isolation a better approach? A. As a result of the significant volatility experienced in the capital markets and its impact on schemes funding positions, 2009 has brought greater focus on trustees de-risking options. Interest in traditional de-risking opportunities such as LDI strategies and buy-in solutions has increased and we have also seen the creation of a new market in longevity swaps, where trustees are able to hedge their longevity exposure, but retain all of their asset risks. However, the longevity swap market is still in its infancy with only a small number of transactions completed to date, so we would only expect to see a limited number of transactions close in B. HUGO JAMES Trustees advisers and investment managers play a key role in both educating trustees about and creating potential de-risking strategies. For example Legal & General will work with trustees and their advisers to define and implement a flight path to buy-in which uses clearly defined triggers to de-risk a scheme in a systematic step-by-step approach with the ultimate goal of achieving an insured buy-in over a targeted timeframe. C. The optimal solution for trustees is to create a clear roadmap for how they will de-risk. This should be a plan that involves clear steps and measurable triggers that allow a scheme to act quickly to make the most of market opportunities as they arise. Such a plan will also allow trustees to assess how they are progressing against their goals. When creating a plan it is worthwhile starting the de-risking roadmap with an initial de-risking step, which may for example be to carry out a buy-in for a segment of pensioners that the scheme can currently afford. The risk of not creating a plan with clear triggers that allow fast action, but instead focusing on specific risks in isolation on an ad-hoc basis, is that scheme trustees will miss opportunities as they arise. An example of this was when several schemes were in a position to achieve a buy-in at end 2008, but did not act quickly enough and have since seen their funding position deteriorate. As a result they are no longer in a position to transact. A. ANDREW STOKER Although longevity-only transactions have been a reality in the reinsurance sector for many years, the concept has only recently been used by pension schemes. These have raised the profile of this new derisking option. Another relatively recent development is the partial buy-in concept, where a proportion of all benefits (or all pensioner benefits) is insured. Partial buy-ins reduce all risks in relation to the members covered by the insurance, rather than just their longevity risk. Lucida s recent 500m deal with the Merchant Navy Officers Pension scheme is a good example of a partial buy-in. Perhaps the biggest change over the year has been the improvement in economic conditions since the end of That should increase the affordability of derisking options for pension schemes and may mean that we see a growth in buyout activity in B. The start point to de-risking would be to better understand the risks to which the scheme is exposed. These include: Market/investment risk the risk that the pension fund does not deliver the required investment returns Economic risk the risk that interest rates fall or inflation is higher than expected Longevity risk the risk that members live longer than expected Operational risk the risks associated with running the scheme Legal risk the risk that the regulatory environment changes to the detriment of the scheme Counterparty risk the risk that one or more of the partners in the management of the scheme fails Sponsor risk the risk that the sponsor is no longer able to support the scheme. C. Although having a de-risking roadmap is a better approach, the absence of a detailed holistic plan should not be used as an excuse to delay risk reduction. Certain de-risking actions are likely to be beneficial in all circumstances, for example if the scheme has poor quality data then data cleaning will reduce operational risk and may even be a pre-requisite for other de-risking actions. However, reducing one risk may lead to an increase in others (for example, increased counterparty risk if administration is out-sourced). Once the de-risking roadmap has been developed, the first steps may still be to address specific risks in isolation. Such a map may leave some long term decisions open. ENGAGED INVESTOR JANUARY/FEBRUARY 2010 xi

12 TRUSTEE GUIDE TO BUYOUT AND DE-RISKING EMMA WATSON ANDY REED NEVILLE McKAY A. Traditionally, trustees have been limited to strategies such as liability-driven investment or reducing scheme liabilities through closure to new members/future accrual. More recently, increased competition in the bulk annuity marketplace has provided some schemes with the opportunity to transfer their liabilities to insurers. Volatile financial conditions post-september 2008 increased the demand for risk reduction, but also increased the gap between buyout pricing and scheme funding, making full buyouts more difficult for pension schemes to achieve. Consequently, alternative solutions for under-funded schemes were developed, with pensioner buy-ins being one of the most prevalent transactions in Longevity-only solutions were also developed with the first longevity swap directly between an insurer and a pension scheme being announced. With the increase in choice, trustees have had to determine affordability and best fit for their own particular circumstances, which has required them to take into account the value of removing each specific risk in exchange for greater certainty. B. Although trustees are typically the primary decision-makers in any plans to de-risk, they should seek a consensus among key stakeholders. One of the first steps trustees can take is to start a dialogue with the scheme sponsor to ensure a convergence of objectives. Various factors should be considered, such as risk management, financial and business objectives, funding levels of the scheme and any additional funding available. If buy-in/buyout are considered feasible, it may be appropriate to establish a sub-committee to undertake research and initial selection. Alternatively, a longer-term path to buyout may be considered if revisions to the scheme s governance, investment mandate or benefit structure appear to be necessary first steps. C. The best approach will depend on the trustees ultimate objective. If the trustees and scheme sponsor are dedicated to an ongoing scheme, understanding each risk and addressing it may be viable. If future de-risking is envisaged, a roadmap allows trustees to understand the immediate impact de-risking may have on future risk reduction strategies. For instance, a longevity swap should protect against the risk that buyout prices rise due to increases in longevity. Trustees need to understand how to exit the swap in the event of a buy-in or buyout. It cannot be assumed that the swap will be an asset desired by the insurer as many multi-line insurers do not hedge longevity risk. A. Trustees have seen a widening of the derisking solutions now available to them in the market. However, in many cases the economic climate has restricted their ability to implement such solutions, due the impact on the scheme funding position and a lack of capital backing from sponsoring employers. Consequently, more schemes have adopted in-house solutions, such as closing to new members, closing to future accrual, or changing the benefit structure. We expect the trend of developing innovative solutions to continue throughout 2010, providing trustees with even greater choice particularly regarding affordable solutions, or solutions that help trustees take their first steps towards full derisking. If economic conditions improve enough to allow more trustees to implement their de-risking strategies, we expect to see a much busier year in B. It is important that trustees and sponsoring employers are fully aligned to a de-risking strategy as there are clear benefits for both parties (and to pension scheme members) if the strategy is well considered. Having the full buy-in from the sponsor and a clear understanding of what commitment they are able to make, if any, towards additional funding for any de-risking solutions is paramount. Trustees can lose time and money assessing options that may not be affordable. The second key point is understanding all the de-risking options available, to help assess the best route to achieving your strategy. This is where independent advice is paramount. Some professional advisers, such as Employee Benefit Consultants, specialise in this market and have a comprehensive understanding of the solutions on offer. This can be enhanced by providers, such as Prudential, who are able to help schemes and their advisers, by developing bespoke solutions that meet their specific requirements. C. Without a well considered long-term strategy, trustees will simply have no idea whether the impact of any de-risking solutions adopted in the short-term will be effective, or even relevant to them. Part of the agreed roadmap may well be to tackle specific risk hot-spots along the way, but these should form pieces of a larger jigsaw. If trustees attempt to address specific risks as they arise, without first assessing an overall strategy, they could cause more harm than good in the long run. A. Following the Babcock International longevity transactions in mid-2009, it is now clear that trustees can hedge longevity risk independently of financial risks. The RSA Group deal confirmed there is significant capacity in the market and that large schemes can effect buy-ins. We also saw a significant increase in liability management, the most common being enhanced transfer values (ETVs). Financial conditions were not generally favourable for ETVs in 2009 but were noticeably improving towards the end of the year. We therefore expect significant activity in We also expect to see other forms of liability management, such as early retirement exercises and foregoing pension increases. After a lull in 2009, interest rate and inflation derivatives are also likely to become more attractive in 2010 as the banking sector rebuilds. B. The important thing is to get started. Even if the first step is modest, it creates momentum. Schemes that have not yet taken action should address their interest and inflation risks since these are unrewarded risks and typically a large proportion of the total risk budget. On investment strategy, diversification is the one free lunch. Those trustees who have relied upon equities for outperformance should consider the merits of other asset classes. Asset allocation is likely to be more dynamic in the future. Trustees will look to de-risk in real-time when conditions are favourable. Others should consider solutions for the three categories of member: actives, deferreds and pensioners. Typically these will include: scheme design changes for actives, liability management for deferreds and buy-in for pensioners. C. A roadmap is preferable as having a clear idea of all the solutions to be implemented will allow trustees to prepare in the most efficient manner by capturing overlap between various options. Trustees should not only identify potential investment, liability management and settlement solutions but also specify the financial conditions in which these solutions are effective. The trustees then need to ensure they are fully prepared to act. This is not usually straightforward. Ensuring membership data is fit for purpose can take months, for example. At the same time, trustees will need to establish a system of monitoring that identifies windows of opportunity. Finally, trustees should be ready to act swiftly and decisively. Windows of opportunity come and go uncomfortably quickly. xii JANUARY/FEBRUARY ENGAGED INVESTOR

13 DIRECTORY LEGAL & GENERAL LUCIDA METLIFE ASSURANCE CONTACT: Hugo James Sales Development Director Bulk Purchase Annuities + 44 (0) LOCATION: Legal & General Group Plc One Coleman Street London EC2R 5AA +44 (0) COMMENT: Legal & General is one of the UK s leading financial services companies. Over 6.5 million people rely on us for life assurance, pensions, investments and general insurance plans and we are responsible for investing in excess of 310 billion worldwide (as at 30 September 2009) on behalf of investors, policyholders and institutions. We have more than 20 years continuous activity in the bulk annuities market and pay more than 1 billion each year in pension payments to over 550,000 pensioners. We work closely with pension scheme trustees, their advisers and scheme sponsors to deliver de-risking solutions, which include: buy-ins and buyouts, liability driven investment ( LDI ) strategies and flight-path to buy-in solutions, which provide clear stepping stones that trustees can follow on the route to achieving a full de-risking of a scheme s pensioners through an insured buy-in. CONTACT: John Smitherman-Cairns Corporate Development Director +44 (0) LOCATION: 84 Grosvenor Street London W1K 3JZ +44 (0) COMMENT: Lucida is an insurance company focused on the annuity and longevity risk business, including the defined benefit pension buyout market and the market for bulk annuities. We offer tailored solutions to the risks, volatility and administrative obligations associated with corporate defined benefit pension schemes. Lucida is backed by Cerberus Capital Management L.P., one of the world s leading private investment firms. Lucida plc is authorised and regulated by the Financial Services Authority ( FSA ). Lucida offers a complete range of solutions for businesses looking to reduce the risks they face in running a defined benefit pension scheme including full or partial buyout, buy-in and longevity-only insurance. What makes Lucida stand out is the unique combination of expertise and experience of our team, with our focus on working openly and closely with our clients to develop and deliver the very best tailored solution. This ensures that our clients enjoy the very best of outcomes customised for their particular objectives and circumstances. To find out how Lucida can help you, please contact John Smitherman-Cairns at CONTACT: Emma Watkins Head of Relationship Management +44 (0) or +44 (0) LOCATION: MetLife Assurance Limited 15 Bedford Street London WC2E 9HE COMMENT: MetLife Assurance Limited is a FSA authorised, UK insurance company providing bulk annuity solutions for occupational pension schemes. We take pride in developing the right pension risk management solution for each client. Our experienced team works closely with trustees, pension managers, employers, consultants and advisors to understand their unique needs and financial goals, and help them bridge the gap from pension risk to future security. We replace the uncertainty of pension scheme risk with the security of an insurance contract, offering a range of full, partial and tailored pension risk management solutions. Our solutions are backed by our strong capital position (rated A+ by Standard & Poor s) and financial strength, and built upon over 85 years of pension risk management experience in the US. Clients of MetLife Assurance and their scheme members can feel secure in our dedication to providing their pension benefits with a high level of service and customer care. ENGAGED INVESTOR JANUARY/FEBRUARY 2010 xiii

14 DIRECTORY PRUDENTIAL TOWERS WATSON CONTACT: Martyn Phillips Corporate Deal Principal + 44 (0) Anil Sharma Corporate Deal Principal + 44 (0) LOCATION: Defined Benefit Solutions 121 Kings Road Reading RG1 3ES COMMENT: Prudential is one of the UK s largest providers of corporate pension solutions, offering a wide choice of defined benefit de-risking strategies and DC pensions. We work closely with pension trustees, employers and employee benefit consultants to develop innovative risk management solutions that are tailored to suit specific scheme requirements, including: Buyouts Pensioner Buy-ins Enhanced Transfers DC Pensions Our team of experts provide dedicated support to help implement tailored solutions and to ensure your specific needs are met. As one of the first providers of DB de-risking, we have built a strong reputation for trust and expertise, backed by an impressive track record for delivering quality solutions. We ve successfully implemented over 430 bulk annuity transfers to secure 5.4bn worth of pension liabilities (including the first insured buy-in to exceed 1bn). We also provide award winning DC pension solutions to over 4,400 UK pension schemes (including 20% of the FTSE 350 companies), supporting around 640,000 scheme members. Prudential is a well diversified, international financial services group with over 21 million customers and 245bn worth of assets worldwide (at 30 June 2009). We are recognised as one of the stronger and more stable UK financial services brands, with the credit reserves and capital surplus required to support longterm corporate solutions. CONTACT: Michael Chatterton Settlement Solutions +44 (0) LOCATION: Towers Watson 21 Tothill Street Westminster London SW1H 9LL COMMENT: Towers Watson is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. With 14,000 associates around the world, we offer solutions in the areas of employee benefits, talent management, rewards, and risk and capital management. Our focus is on giving you the clarity to make the right decisions and take the right actions. And our approach is grounded in perspective the kind that comes from our deep experience working on a wide range of issues. But more important, our perspective begins at eye level with a clear understanding of your organization, the way you work, your goals and your challenges. By connecting the big picture and your picture, we help you achieve real-world results. DIRECTORY xiv JANUARY/FEBRUARY ENGAGED INVESTOR

15 Bridging the gap between pension risk and future security If you re a trustee or employer looking to increase the security of members pension benefits, we can help. As a UK specialist bulk annuity provider, we offer expert, tailored solutions for your pension scheme building upon our US heritage. Through our consultative approach we aim to present the best possible arrangement based on your scheme s unique needs and your financial objectives. And we are dedicated to providing a high level of service and customer care for your scheme members now and into the future. MetLife Assurance: Is well capitalised and financially strong Offers a range of full, partial and tailored pension risk management solutions to help meet your financial goals Helps replace the uncertainty of market returns with the security of a guaranteed insurance contract Builds upon over 85 years US experience in pension risk management To discuss your pension risk management goals, contact Emma Watkins, Head of Relationship Management: ,

16 CAN YOU AFFORD TO DE-RISK YOUR PENSION SCHEME? Can you afford not to? We ll work closely with you to tailor the right risk management solution for your pension scheme. So far, we ve implemented more than 430 de-risking arrangements to help secure over 5.4 billion worth of pension liabilities. To find out more, please speak to your corporate adviser, or visit Prudential is a trading name of The Prudential Assurance Company Limited, of Prudential Annuities Limited and of Prudential Retirement Income Limited. This name is also used by other companies within the Prudential Group, which between them provide a range of financial products including life assurance, pensions, savings and investment products. The Prudential Assurance Company Limited and Prudential Annuities Limited are registered in England and Wales. Registered Office at Laurence Pountney Hill, London, EC4R 0HH. Registered numbers and respectively. Prudential Retirement Income Limited is registered in Scotland. Registered Office at Craigforth, Stirling FK9 4UE. Registered number SCO Authorised and regulated by the Financial Services Authority.

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