Lane Clark & Peacock LLP

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1 Lane Clark & Peacock LLP Pension Buyouts 2009

2 This is the second edition of the Lane Clark & Peacock LLP Pension Buyouts report. It provides an in-depth analysis of pension buyout and longevity transactions in the UK. Lane Clark & Peacock LLP (LCP) is a leading actuarial consultancy at the forefront of advising companies and trustees on buyout and longevity hedging opportunities. LCP has developed the expertise and specialist skills needed to successfully negotiate and implement a pension plan buyout, buy-in or longevity hedge, combined with a wider understanding of how de-risking options fit into corporate and trustee strategy. UK Professional Pensions Awards Actuarial Consultancy of the Year Investment Consultancy of the Year 2007 FT Business Pensions & Investment Provider Awards Actuarial Consulting Investment Consulting Corporate Adviser Awards Best Member Communication Strategy 2008 Best use of Technology by a Corporate Adviser 2008 Best Strategy for Investment Advice on Pensions 2009 For further information about pension buyouts, longevity hedging and LCP s specialist de-risking services please contact Clive Wellsteed, Charlie Finch, Jill Ampleford, Jerome Melcer, Michael Berg or Ken Hardman in our London office or David Stewart in our Winchester office, or the partner who normally advises you. For further copies of the report, please download a copy from our website or contact Mark Roberts on +44 (0) or [email protected]. This report may be reproduced in whole or in part, without permission, provided prominent acknowledgement of the source is given. Although every effort is made to ensure that the information in this report is accurate, Lane Clark & Peacock LLP accepts no responsibility whatsoever for any errors, or the actions of third parties. The purpose of the report is to highlight the recent changes and developments within the buyout market. This report and the information it contains should not be relied upon as advice from LCP or a recommendation as to the appropriateness either of proceeding with a buyout, buy-in or longevity hedge or of any particular insurance company or provider. Specific professional advice should be sought to reflect an individual plan's circumstances. Lane Clark & Peacock LLP May 2009

3 Pension Buyouts 2009 Pension Buyouts 2009 The UK pension buyout market currently comprises: insurance companies competing to take investment and longevity risks from pension plans in return for a premium; and CONTENTS financial institutions competing to take on longevity risk from pension plans, with the trustees retaining control of the investment of the plan assets. Lane Clark & Peacock (LCP) has worked with the main players in the market to create the industry s most comprehensive database of: completed transactions since January 2008; and potential pipeline deals currently being considered by pension plans. We are grateful to the following institutions who have contributed to this report: AEGON, AIG Life, Aviva (formerly Norwich Union), Legal & General, Lucida, MetLife, Paternoster, Pension Insurance Corporation, Prudential and Rothesay Life (Goldman Sachs). Introduction Page 2 Market development Page 4 Market drivers Page 6 Preparing for a transaction Page 12 Market outlook Page 14 Business written Page 16 Security arrangements Page 19 Longevity hedging Page 22 Appendices 1 Protections 2 Insurance reserving 3 Longevity hedging 4 Transactions Page 27 Page 28 Page 30 Page 32 De-risking glossary Page 34 1

4 Pension Buyouts 2009 INTRODUCTION Key conclusions The September 2008 financial crisis marked the start of a new chapter in the UK pension buyout market, requiring pension plans and insurance companies to adapt to unprecedented global events. Insurance companies responded through stronger reserving and more cautious pricing. Paternoster has gone one step further and agreed with the FSA that it will not, for the time being, write any new business. Despite these challenges, over 900 million of buyout business was closed in the first quarter of Going into the second quarter, investment market conditions particularly in the swaps market are beginning to improve which will help pricing. The longevity market is now in a similar position to the pension buyout market two years ago prices have come down and the first deal has now been announced. However, we anticipate slower initial growth in the longevity market due to the more sophisticated nature and larger sizes of these deals. Buy-ins and longevity swaps are both effective forms of de-risking however their relative attractions will change over time as pension plans move towards their eventual end game. For longevity swaps it is important to consider the exit strategy for when the time eventually comes to buyout and wind-up in full. Access to capital and stronger reserving requirements are likely to be the main drivers for future consolidation in the pension buyout market. One established route is the transfer of business between insurance companies for example Prudential has acquired around 5 billion of individual annuities in insurer-to-insurer transfers since There will be a steady and growing demand for viable de-risking options as defined benefit pension plans continue to mature. We expect the emergence of insurance companies from the financial crisis to reinforce pension buyouts as sensible and effective means of securing pension promises to members. LCP is at the forefront of advising companies and trustees on buyout opportunities: We designed and implemented the first of the new-style pensioner buy-ins at the start of 2007 and since have completed 10 further buy-ins over 50 million. We advised on two out of the three significant buy-in deals which have included bespoke protections to provide additional security to pension plan trustees. In an article by Financial News in January 2009, we were recognised as one of the leading buyout advisers over 2008, having advised on more medium or large buyout deals than any other adviser. This followed LCP s market leading position in 2007, where we advised on 50% of all medium or large buyout deals. We are currently working with a range of major organisations and their pension plans to assess buyout and longevity swap opportunities. 2

5 Pension Buyouts 2009 INTRODUCTION Market statistics Total buyout business volumes for 2008 were 7.9 billion and several landmark deals were struck such as the first 1 billion deal between Cable & Wireless and Prudential. Business volumes in 2007 were 2.9 billion. Legal & General and Pension Insurance Corporation dominated the buyout market in 2008 and continued to do so in the first quarter of Conversely, Paternoster, who had a 50% market share in 2007, has not written any new deals since September Volumes of buyout business reduced to 900 million in the first quarter of 2009 the lowest quarterly volume since was characterised by insurance companies producing high volumes of quotations, many of which did not go on to complete. Data provided by insurance companies shows that less than 20% of quotations led to a completed deal in Data provided by insurance companies shows that buyout quotation volumes are down 60% in the past 12 months. However, a much higher proportion of quotations are at an advanced stage, including a number of pension plans in detailed negotiations. We expect 2009 to be characterised by a lower quantity, higher quality buyout pipeline. There is continued evidence that companies are recognising the cost of increased longevity. Over the last three years, FTSE 100 companies have added an extra year every year to pensioner life expectancy. This is likely to increase the demand for buyout and longevity hedging options. Business written in the insured buyout market 2,500 2,000 million 1,500 1, Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q

6 MARKET DEVELOPMENT Pension Buyouts 2009 Market development 2006 and 2007 saw dramatic growth in the buyout market as an explosion of new and established providers developed buyout offerings. In contrast, the past 12 months has seen both new entrants and departures. Synesis Life exited the buyout market in 2008 after failing to secure any transactions. Pension Insurance Corporation subsequently acquired assets and some key members of Synesis Life s team. Swiss Re entered the market with a range of de-risking options but is now focusing on longevity-only transactions. A number of financial institutions continue to watch the buyout market closely with a view to getting more actively involved, although this is set against a backdrop of difficulties in raising new capital. Paternoster has agreed with the FSA that it will not, for the time being, write any new business. Insurer Correct as at May 2009 Date of entry April 2006 May 2006 June 2006 October 2006 January 2007 July 2007 July 2007 November 2007 Offers longevity-only hedging? Longevity hedging for pension plans is presently available from a range of providers, primarily investment banks and insurance companies. The major players not listed above include: Institution Type of entity Investment bank Investment bank Investment bank Reinsurer 4

7 Pension Buyouts 2009 MARKET DEVELOPMENT Types of buyout This report covers buyouts by UK defined benefit pension plans with insurance companies that are authorised and regulated in the UK by the Financial Services Authority (FSA). It also covers longevity hedging options available from insurance companies and the capital markets. Full definitions of the different types of buyouts are set out in the Glossary. The key types are as follows: see page 34 for the Glossary of de-risking terms Buyout The process whereby a pension plan s liabilities are transferred to an insurance company and the obligation for the pension plan to provide those benefits is ceased. Usually this covers all of the liabilities of the pension plan as a full buyout and is followed by the wind-up of the pension plan. Examples: Rank, Thorn, M-Real Corporation Buy-in The purchase of an annuity contract with an insurance company as an investment to match some or all of a pension plan s liabilities, and therefore reduce risk. Crucially the liabilities remain in the pension plan and the trustees retain responsibility for them. Commonly this covers the pensioner liabilities as a pensioner buy-in but there have been several buy-ins of non-pensioner liabilities or a sub-set of pensioner liabilities. Examples: Cable & Wireless, TI Group, Friends Provident Longevity hedge The purchase of an investment to remove or reduce the risk of pension plan members living longer than expected. Examples: Babcock International* This report does not cover non-insured buyouts. In 2007 there were four such deals (telent, Thorn, Thomson Regional Newspapers and Thresher) whereby liabilities were transferred to institutions that were not FSA authorised insurance companies. Since then we have not seen any further deals. However, in May 2009, Bridge Pointe a Bermudan based captive insurance company has announced its entry to the market, offering a non-uk insurance-based stepping stone to full buyout. This report also excludes insurer-to-insurer transactions such as the 300 million deal between Rothesay Life and Prudential to reinsure the pensioners of the Rank pension plan. * Babcock International announced on 12th May 2009 that it had agreed in principle with two of its pension plans to enter into longevity hedges with an unnamed counterparty. 5

8 Pension Buyouts 2009 MARKET DRIVERS Market drivers The fifteen month period covered by this report can be divided into the periods before and after the collapse of Lehman Brothers in September January to September 2008 In the first part of 2008, buy-in prices for pensioners were frequently lower than the funding reserves being agreed between trustees and companies in their actuarial funding valuations the lowest point was reached in March This provided an opportunity for pension plans to transfer investment and longevity risk to an insurance company without increasing their funding deficits or requiring accelerated cash contributions to be paid into the pension plan. This can clearly be seen from the chart on page 9. Many of the deals were pensioner buy-ins, reflecting the fact that most pension plans had funding deficits and could not afford a full buyout. In addition, trustees and companies had a greater awareness of new options available in the market such as pensioner buy-ins. see page 19 for further information on additional security arrangements The deals over this period covered a wide spectrum of companies: from FTSE 100 companies (such as Cable & Wireless) to engineering companies (such as BBA and Powell Duffryn) to non-governmental public organisations (such as Ofcom) and, in the case of Friends Provident, a life insurance company choosing to transfer pension risk to another life insurance company. Major deals in January to September 2008 include: Friends Provident A 360 million pensioner buy-in with Aviva (formerly Norwich Union). This was the first deal to include a security arrangement where a portion of the premium is held in a segregated premium account. TI Group TI Group s pension plan undertook two 250 million buy-ins, the first with Legal & General in March and the second with Paternoster in September, covering different segments of their pensioner population. Delta A 450 million pensioner buyout with Pension Insurance Corporation. This was the only significant pension buyout in 2008 (all other significant pensioner deals were buy-ins). Delta plc paid 50 million to achieve a complete transfer of the liabilities through a buyout. Cable & Wireless The largest buy-in ever at 1,050 million with Prudential. The deal included an additional security arrangement. A 10 million cash payment was made by the sponsor to facilitate the transaction. 6

9 Pension Buyouts 2009 Major buyout and buy-in transactions Financial crisis 7

10 Pension Buyouts 2009 MARKET DRIVERS Post September 2008 see page 29 for commentary on insurance companies allowances for defaults on their corporate bond portfolios The collapse of Lehman Brothers signalled some dramatic changes to the market both to the practicalities of completing a buyout and in the attitudes of trustees and companies towards them. The key changes included: insurance companies adopted more cautious pricing and reserving assumptions in particular many insurance companies increased their assumed default rates on corporate bonds backing their annuity portfolios to reflect a gloomier economic outlook; many key investment markets became significantly less liquid this impeded asset transfers from pension plans to insurance companies as market prices for certain assets were distorted, thereby making accurate valuation difficult; and confidence in financial institutions was eroded as evidenced by investors heavily marking down insurance company share prices. Trustees of larger pension plans increasingly sought additional protections as part of buy-in contracts. Each of these factors is explored in the sections below. We then look at the outlook for the buyout market in 2009 and beyond. Major deals since September 2008 include: Thorn The largest buyout ever at 1,100m. This was previously a non-insured buyout in As part of the buyout a 5% uplift was provided to members pensions from surplus funds. Pricing and reserving Following the collapse of Lehman Brothers in September 2008, there was a sharp increase in buyout prices, both in absolute terms and relative to funding and accounting valuations. see page 29 for further details on the challenges facing insurance companies Lehman s collapse also represented a step-change in attitude towards the likelihood of financial institutions defaulting. This is significant as the financial sector is a major issuer of the corporate bonds held by many insurance companies to back their annuity portfolios. The level of increase in buyout prices since September 2008 has varied widely, reflecting differing outlooks for defaults on corporate bonds. Many insurance companies also moved away from investing in debt issued by the financial sector. Insurance companies underlying investment strategies are also relevant. For example, many insurance companies link their pricing to the market prices of the swaps and other derivatives they plan to invest in after taking on new business. Thin trading volumes in the inflation swaps market have led to distorted pricing since September 2008 and this has fed directly into higher prices. 8

11 Pension Buyouts 2009 MARKET DRIVERS The divergence in pricing between different insurance companies is clearly shown in the chart below: Divergence in buy-in pricing Financial crisis Lehman Brothers insolvency Investment conditions began to improve in April 2009 particularly in the swaps market and we expect this to have a beneficial impact on pricing Buy-in premium equals 100 at 31st December 2007 The divergence in pricing has two key implications for pension plans: it is more difficult to gauge what prices will be in advance of obtaining detailed buyout or buy-in quotations; and it is even more important to understand how insurance companies are pricing and to carefully consider the asset implications both on how to invest to match the insurance companies pricing and the strategy for transitioning assets. Most pension plans are likely to conclude that there is a modest immediate increase to the valuation deficit if they proceed with a pensioner buy-in. The challenge for pension plans is to consider what level of increase is acceptable in return for the risk reduction achieved by the transaction. 9

12 Pension Buyouts 2009 MARKET DRIVERS Confidence in financial institutions see page 27 for policyholder protections The wider deterioration in the UK and global economy over late 2008 and early 2009 has impacted on attitudes towards insurance companies both from investors and pension plan trustees. This led many pension plans to adopt a wait-and-see approach to buyout with completed deal volumes falling as a result. The reduction in investor confidence can clearly be seen from the chart of insurance company share prices below. In line with most financial stocks, the share prices of insurance companies were marked down heavily in early This reflected market concerns that further shareholder capital would be needed to strengthen policyholder reserves. Since then, there has been a rebound in sentiment as confidence grows that insurance company reserves are adequate to meet the challenges of the next few years. However, share prices are likely to remain volatile until greater certainty emerges on the economic outlook. 10

13 VIEWPOINT Despite negative factors, we continue to view favourably the strength of [life insurance] regulation in the U.K., improvements in risk management across the [life insurance] sector, the long-term fundamental strengths of the U.K. economy, and the size and diversity of the U.K. life market. Standard & Poor s 25th February 2009

14 PREPARING FOR A TRANSACTION Pension Buyouts 2009 Practical steps to prepare for a pension buyout or buy-in The implementation of a pension buyout or buy-in is a significant exercise and there are a number of steps that companies and trustees can take now to ensure they can act quickly to take advantage of attractive pricing when market conditions are right. Set up a trigger-based approach A buy-in is essentially an investment decision. Therefore it is helpful to set up a framework for assessing whether a buy-in price represents an attractive investment. By monitoring pricing closely, pension plans can identify when the price is within their target zone and work quickly to execute and achieve the desired risk reduction before the opportunity goes away. Possible action: Agree a trigger for assessing whether buy-in is attractive (eg relative to technical provisions) so that when price triggers are met the transaction can be executed rapidly. Review your data Whether trustees are aware of them or not, most pension plans have a range of issues with their data (from untraced members to key data not being held electronically). This can significantly delay transactions. If insurance companies are concerned about data quality they may add margins to their prices, or even refuse to quote at all. Possible action: A data audit in advance of a buyout process can speed up negotiation and implementation, as well as providing keener and more certain pricing. It can also improve the ongoing governance of a pension plan. Review your investments Transitioning significant amounts of assets can be challenging in volatile financial markets and this has been a significant hurdle in recent transactions. By reviewing the marketability and liquidity of the pension plan s investments in advance of any deal, work can be undertaken to prepare asset portfolios to allow a buyout transaction to be executed more rapidly. Some pension plans may also wish to adjust their investment strategies to better match their position against buyout or buy-in pricing. Possible action: Consider transitioning your assets into a form acceptable to insurance companies whilst ensuring they remain marketable and liquid to retain flexibility. Review the insurance companies One of the most difficult decisions for trustees is the ultimate selection of the insurance company to place the business with. This decision can be made easier by spending time now understanding who the insurance companies are and what they can offer. Assessing the insurance companies strengths and weaknesses, understanding the UK insurance regime and considering potential selection criteria will allow the final decision on selection to be made much more quickly when the time comes. Possible action: Meet the insurance companies to understand who they are and what they can offer. 12

15 LCP INSIGHT In our experience, careful preparation pays dividends for companies and trustees when executing a buyout better insurance company engagement, keener pricing and being able to move quickly when the time comes these are the key ingredients to achieving a successful deal. Clive Wellsteed, Partner, LCP

16 Pension Buyouts 2009 MARKET OUTLOOK Insurance company pipelines quality rather than quantity? The dynamics within the buyout market have changed markedly and this can clearly be seen by examining the insurance companies pipelines: The demand for pension buyouts has reduced in the past year. For example, one of the leading insurance companies has seen the number of pension plans seeking quotations fall by nearly 60%. On the other hand, the quality of the pipeline has improved. One leading insurance company states that over 50% of current deals in their pipeline are beyond the initial quotation stage which compares to around 20% a year ago. The completion rate in 2008 was low. One insurance company states that less than one in five quotations that they issued went on to complete, either with them or another insurance company. We expect the buyout market in 2009 and 2010 to be characterised by quality rather than quantity This paints a picture of a maturing and more orderly market than the initial rush in the summer and autumn of We are also seeing a greater level of sophistication in the deals that go through as trustees develop their requirements and insurance companies develop the features they are able to offer. Demand for buyout from pension plans in 2009 onwards Whilst attractive pricing has been available from a small number of insurance companies in early 2009, most insurance companies have now strengthened their pricing bases. Some pension plans, particularly those who value the risk reduction achieved from a buyout, are proceeding nonetheless and the insurance companies retain a core quality pipeline. However, many pension plans have taken a wait-and-see approach given the current financial turmoil. We expect that buyout quotation activity will pick up over the next few months as confidence begins to return to financial markets. After all, the demand for de-risking remains high the financial turmoil has been an effective demonstration of the level of risk that is being run by UK defined benefit pension plans and their sponsoring companies. In the short-term, depressed pension plan funding levels mean there is limited affordability for full buyouts and so a continued stream of pensioner-only deals is the most likely prospect. Over the medium term there is significant demand for risk reduction, and the recent trend for companies to cut back pension provision and even close pension plans to future benefit accrual will only serve to accelerate this. The pace at which pension plans move towards ultimate buyout depend on investment markets and available cash within sponsoring companies. 14

17 Pension Buyouts 2009 MARKET OUTLOOK How will the buyout market develop? The table below sets out three possible scenarios for investment markets over the next couple of years and the implications for the buyout market. Economic scenario Impact Estimated volumes Optimistic Fiscal stimuli and quantitative easing prove successful Markets rebound over 2009 and 2010 Inflationary pressures potentially grow Pension funding levels recover from lows in early 2009 Buyout market volumes increase as pension plans decide conditions support further de-risking and locking-in of gains through buy-ins and buyouts 7 billion 12 billion Middle of the road Economies struggle throughout 2009 Deflationary pressure through 2009 Unprecedented government bond issuance potentially leading to: fiscal tightening inflationary pressures currency devaluations Steady stream of buyout transactions Initially pensioner-only transactions as they are most affordable Increasing number of full buyouts over the medium term 4 billion 8 billion Gloomy Serious further deterioration in markets Bank of England initiatives prove unsuccessful with resulting debt and fiscal burden Solvency positions of insurance companies become stretched Pension funding levels remain very low Limited buyouts due to concerns over insurance company solvency Most buyouts arise from the wind-up of pension plans where the sponsoring company is insolvent but the plan is funded above the level for entry to the Pension Protection Fund 2 billion 4 billion Insolvent companies a source of new deals? The insolvency of companies with defined benefit pension plans (such as Lehman Brothers and Woolworths) is another source of potential activity for the buyout market. Under UK legislation these pension plans will aim to secure pensions with an insurance company, subject to a minimum level of compensation being provided by the Pension Protection Fund for less well-funded plans. These transactions are generally quite difficult due to the complex legislative requirements and so it may be 2010 before some of these deals start to come through. We may also see some compromise deals where pension plans are bought out as part of a company restructuring or rescue deal. Such deals will involve many different parties, generally including the Pensions Regulator. 15

18 Pension Buyouts 2009 BUSINESS WRITTEN 2008 calendar year 2008 saw buyout volumes hit 7.9 billion, a rise of over 150% on 2007 volumes. The following chart shows the market share of each insurance company over 2008 by value of transactions written. All significant transactions in 2008 and the first quarter of 2009 are listed on page 32 Insurance company market share over 2008 by transaction value For all insurance companies, there is a delicate trade-off between achieving market share and return on capital Whilst 2007 was split between Legal & General and Paternoster with over 90% of business between them, in 2008 the business was much more evenly split demonstrating the greater maturity of the market. Six insurance companies now make up over 90% of the market. Legal & General s and Paternoster s shares have reduced since 2007, but they are shares of a much larger market. Legal & General had the highest volumes at 1.9 billion up from 1.4 billion in 2007 and replacing Paternoster in first place. Conversely, Paternoster pulled back from the market in the fourth quarter. This allowed Prudential to push them into fourth place with their 60 million deal with the Thomson Regional Newspapers pension plan in December. Pension Insurance Corporation was perhaps the surprise entrant in Having written no insured buyouts in 2007 or in the first four months of 2008 they wrote five deals before the end of 2008 totalling 1.7 billion. This put them in second place with a market share of 21%, only marginally behind Legal & General. Lucida and Prudential also separately struck deals with Bank of Ireland Life and Rothesay Life. As these deals were not with UK defined benefit pension plans they are excluded from the figures in this report. 16

19 Pension Buyouts 2009 BUSINESS WRITTEN 2009 quarter one The first quarter of 2009 saw over 900 million of business written. The following chart shows the market share of each insurance company over the first quarter of 2009 by value of transactions written. The volume of business written by each insurance company is set out on page 33 Insurance company market share over Q by transaction value Legal & General carried on their success into the first quarter of 2009, writing just over 500 million and giving them the leading market share. Pension Insurance Corporation also continued to be successful writing 226 million of business. Paternoster remained out of the market in 2009 citing that the current regulatory and financial uncertainties are making pricing difficult and that their primary obligation is the security of policyholders. At the current time they are not accepting further liabilities. AIG Life wrote its largest buyout yet of 29 million at the end of March 2009 showing that whilst its parent company in the US has had highly public difficulties there is still confidence in the UK insurance business as a continuing entity. 17

20 LCP INSIGHT A well structured security arrangement, available at a proportionate price and with a clear understanding of the limitations, can provide additional protection and comfort to members, trustees and sponsoring companies. Charlie Finch, Partner, LCP

21 Pension Buyouts 2009 Security arrangements for buy-ins In 2008, some larger pension plans began to seek additional security arrangements as part of buy-in contracts and this trend is likely to continue into 2009, certainly for larger transactions. The protections available aim to reduce the impact on the pension plan of insurance company default. SECURITY ARRANGEMENTS The key challenge for trustees and sponsoring companies is to balance the cost of any security arrangement against the additional security it provides. In our experience, a proportionate approach is vital. This should take into account the financial strength of the insurance company and the sponsoring employer and analyse the extent to which the security arrangement enhances the basic protections of the UK insurance regime. Since August 2008 LCP has advised on two major completed buy-ins involving additional security arrangements and three without Arrangements to provide additional security generally offer pension plans a surrender value or collateral or both. Trustees and sponsors should be aware that there will be ongoing costs to operate and monitor a security arrangement. Surrender values A surrender value gives trustees the right to take back a level of assets should certain triggers be met. In practice, there is no certainty that the surrender value would actually be obtainable in a distressed situation. For this reason it is common to seek some form of collateral. 19

22 Pension Buyouts 2009 SECURITY ARRANGEMENTS Basic collateral arrangement There are a number of ways of structuring a collateral arrangement but the basic concept can be summarised as: the insurance company places an amount of money in a fund separated from the insurance company s other assets; and if certain trigger mechanisms are breached, then the trustees are entitled to take back the segregated assets. The segregated fund can either be within the insurance company s legal group structure, within a separate standalone vehicle or within the pension plan s legal structure. Collateral arrangements only exist for buy-ins once converted to individual member policies the collateral arrangement ceases, as it is impractical to manage across a large number of policies. Whilst Aviva s (formerly Norwich Union) collateral arrangement is being marketed for buy-ins above 100 million, most of the collateral arrangements being offered in the market are only being made available for buy-ins of 500 million or more. Operation of a basic collateral arrangement Some of the key questions for trustees to consider when assessing the value of a collateral arrangement are: how much and what type of collateral is being posted? under what circumstances can trustees gain access to the collateral? where does the pension plan rank relative to the other creditors? 20

23 Pension Buyouts 2009 How much collateral is being posted? The amount of collateral that an insurance company will post is critical, and can vary significantly. Ideally trustees would wish the collateral posted to be at least the replacement value of the insurance policy. However, this potentially open-ended level of commitment can be an expensive option. SECURITY ARRANGEMENTS Conversely, if collateral is set at too low a level then it may not pay out any more than the trustees would have received in any case in an insolvency situation. It is also important to ensure the level of collateral posted is updated frequently to take account of market movements, as extreme events can happen very quickly. What type of collateral is posted? When setting up a collateral arrangement it is important to remember that the most likely time for it to be exercised is in a period of severe economic stress. Under such a scenario the types of assets included in the arrangement are vital, as many asset classes are likely to be both difficult to price and difficult to sell. Trustees and corporate sponsors should look for marketable, transparently valued assets that are likely to hold their value in an economic downturn. If not, they could find that the value of their collateral reduces at precisely the time when it is most needed. Under what circumstances can trustees gain access to the collateral? The level of trustee access to the collateral will depend on the type of arrangement. However, it is key that the trustees would be able to access the collateral at an appropriate time. If the collateral cannot be obtained before an insurance company becomes insolvent it may be too late. Typically, a collateral agreement will have agreed trigger points which, if breached, will allow the trustees to take full control of the collateral. Examples are: see page 27 for a detailed summary of the protections in place in the UK insurance regime the insurance company breaches specific statutory solvency levels; the insurance company suffers a credit event such as missing a repayment on a bond; or the insurance company s credit rating is downgraded below a certain level. Where does the pension plan rank relative to the other creditors? Trustees should consider where they rank in the event of the insurance company s insolvency. By seeking a fixed or floating charge over the insurance company s assets they may be able to improve their ranking. If an insurance company is to provide a high level of good quality collateral, this is likely to come with an additional cost. This is because the insurance company will have to post additional funds into the collateral arrangement, and under the FSA s treating customers fairly guidelines it will not want to disadvantage existing policyholders. Trustees will need to take a view on how much collateral, if any, they want included in the contract. 21

24 LONGEVITY HEDGING Pension Buyouts 2009 Longevity hedging see page 30 for a description of how a longevity hedge works in practice A longevity hedge allows a pension plan to remove the risk that members live longer than expected but, unlike a buyout or buy-in, there is no transfer of the underlying assets and the associated investment risks. Comparison of risks transferred under a buy-in and longevity hedge There is an established UK and overseas market for the transfer of longevity risk between financial institutions. Interest from UK pension plans has lagged behind the institutional market, but has been building up steadily over the last 12 months. During this time, two of the leading longevity hedge providers have priced hedges on 30 billion of pension liabilities, spanning over 50 pension plans. Several individual cases have been over 1 billion, with at least six FTSE100 companies exploring longevity pricing. This growth in interest culminated in May 2009 when Babcock International announced that an agreement had been reached in principle for two of the group s pension plans to enter into a bespoke longevity hedge the first UK pension plans to do so. We expect that a number of other plans will follow, now that proof of concept has been established. When is longevity hedging most attractive? Whilst many pension plans have considered pensioner buy-ins, longevity hedging can be an attractive alternative de-risking option for larger plans where: there is an appetite to retain investment control and gain exposure to future returns on the underlying assets; there is a desire to reduce counterparty risk, for example with a single insurance company; a buy-in or buyout is difficult to execute, for example due to a shortfall in pension plan funding, difficult investment market conditions, or where pension liabilities are very large; or 22

25 Pension Buyouts 2009 LONGEVITY HEDGING there is a preference to deal separately with longevity and investment risk within the pension plan. Longevity pricing: are we there yet? As with the buyout market, pricing is likely to be the main driver of growth. Pension plans typically evaluate longevity pricing compared to: the expected longevity of plan members built into the trustees funding reserve; and the cost of a buy-in the main alternative for a pension plan seeking to transfer longevity risk. We have seen longevity pricing become more competitive on both measures, in recent months, as providers seek to kick-start the market. The analysis below explores this in more detail. Expected longevity of plan members The last decade has seen pension plans move toward ever-higher longevity allowances, driven by unfolding experience and new research. The chart below shows the impact for a typical pension plan over the last three valuation cycles, compared with actual longevity swap pricing today. Longevity hedging offers a way for finance directors to close out the cost of increasing longevity expectations Any increase to a pension plan s funding reserve from taking out a longevity swap can generally be spread over a number of years, so the actual cash cost is usually modest. 23

26 LONGEVITY HEDGING Pension Buyouts 2009 DIY buyout: longevity hedging versus pensioner buy-in Pension plans can now create their own DIY buyout strategies by hedging individual risks seperately within the pension plan but how do you compare this with a pensioner buy-in? One of the best comparisons is to calculate the breakeven investment return that needs to be achieved on the asset portfolio underlying the longevity hedge in order to beat the pensioner buy-in price. The following chart shows how this breakeven investment return has fallen significantly since Autumn In this case, the underlying assets would have needed to earn 5.5% pa in Autumn 2008, but this had reduced to 3.7% pa by Spring In practice the actual breakeven investment return will vary according to financial conditions and plan specific factors. The combination of changes in investment conditions and lower longevity pricing has made longevity hedging an increasingly viable de-risking solution Many pension plans back their pensioner liabilities with a mixture of gilts and corporate bonds. So, another way of looking at a DIY buyout is to consider the proportion of corporate bonds that would be needed to achieve the breakeven investment return. As can be seen, this proportion has also fallen significantly in recent months and is now much more in line with typical pension plan investment strategies for backing pensioner liabilities. For larger pension plans willing to accept a limited amount of investment risk for the assets backing the pensioner liabilities, there is now a strong case for establishing the price of a longevity hedge. 24

27 Pension Buyouts 2009 LONGEVITY HEDGING What are the challenges facing longevity hedging? The challenges facing longevity hedging include: Whether a longevity hedge would complicate an eventual buyout and wind-up. Pension plans should consider whether a longevity hedge will be an attractive asset for buyout providers to take on as part of a buyout. Trustees should negotiate terms to ensure they ultimately get value for money for any longevity hedge they take out. How to quantify the benefit of the longevity risk removed. Pension plans will want to be convinced that the risk reduction justifies the cost of the longevity hedge. Ongoing management costs including regular valuations, posting of collateral, and additional administration. Of these challenges, the impact on a future buyout is in our view the most material, and we expect this issue to come to the fore in the coming months. The future for longevity swaps In our view the development of the longevity swaps market is a welcome additional option for pension plans looking to de-risk. We see conditions today as especially fertile for this fledgling market. With buyout prices trending up, and pension plans adopting more cautious longevity allowances, longevity hedge pricing is now more attractive than ever before. With an increasing number of plan sponsors focussing on the removal of pension risks from the corporate balance sheet, a key challenge for the longevity market is to persuade pension plans that a longevity hedge is viable as a stepping stone to buyout in the longer term. The first trade by Babcock International is a milestone, providing proof of concept. However, it is not yet clear whether this will signal a rapid growth in activity (akin to the insured buyout market of 2007/2008) or an exceptional event (similar to the short-lived success of the non-insured buyout market in 2007). 25

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29 Appendix 1: Pension Buyouts 2009 Protections for pension buyouts In entering into any significant insurance transaction it is important to understand the structure and security of the insurance company and the protections in place. Multiple layers of protection exist for policyholders who purchase bulk annuity products from FSA-authorised insurance companies in the UK. APPENDIX 1 Protections of the UK insurance regime include: prudent reserving; regulatory solvency capital on top of their prudent reserves insurance companies have to hold additional buffer capital under two key measures: Pillar I typically for pension annuity business this is an additional buffer of at least 4% of reserves; and Pillar II under the Individual Capital Assessment framework each insurance company has to hold capital to ensure there is at least a 99.5% probability of it being sufficient for the next 12 months. potential support from shareholders or other lines of business if capital levels fall; statutory mechanisms to transfer pension annuity business to another ongoing insurance company to provide continuity of cover if the insurance companies capital position is particularly weak; in the event of actual insolvency, policyholders, in general, rank above shareholders and unsecured bondholders and creditors (but behind expenses, secured and preferred creditors); and ultimately the Financial Services Compensation Scheme (FSCS) exists to provide compensation to policyholders. These protections are intended to provide long-term security extremely important for pension buyout business where the pensions may be in payment for 50 years or more. With perhaps a few exceptions, the UK insurance regime is likely to be more secure than long-term dependence on the financial strength of a pension plan sponsor. With that said, the insurance regime is not designed to be a zero-failure regime. We are yet to witness the failure of a significant life insurance company but the risk of failure needs to be assessed and understood before entering into a buyout or buy-in. 27

30 Appendix 2: Pension Buyouts 2009 APPENDIX 2 Insurance company reserving Insurance companies calculate their reserves using assumptions chosen to reflect the characteristics of their assets and liabilities. Two key reserving assumptions are: The mortality assumptions for individuals in the insurance company s annuity book; and The allowance for defaults on corporate bonds in the insurance company s investment portfolio. Mortality assumptions The following chart shows the range of life expectancies underlying insurance company reserving for bulk annuity business. The mortality assumptions reflect the underlying demographics of the individuals each insurance company has insured. Therefore inevitably the underlying life expectancies will vary between insurance companies. This will be particularly noticeable for the newer insurance companies as they grow their business. Each additional year of life expectancy typically adds around 3% to the insurance company s reserves. Source: Insurance company FSA returns and LCP 2008 Accounting for Pensions 28

31 Appendix 2: Pension Buyouts 2009 Corporate bond default assumptions The table below shows the allowances made by three insurance companies in their reserves for future corporate bonds defaults. This area came under particular scrutiny in early In each case the default rate is expressed as a reduction in the interest rate used to set the reserves the higher the reduction, the more prudent the reserves. APPENDIX % reduction for four years, 0.30% reduction thereafter 0.82% reduction 0.67% reduction but some allowance is made for recoveries on defaults The allowance made for defaults can have a significant impact on the disclosed solvency position. For example, Legal & General increased their allowance for defaults over the next four years in their 2008 year end results. This increased their reserves by 650 million. All of the default allowances are high compared to historic levels of default over the last 70 years the challenge is judging a prudent level going forwards. Each insurance company s allowance will reflect the level of prudence in their reserves and the credit quality of the corporate bonds held within their annuity investment portfolios. Each 0.1% reduction in the interest rate adds around 1% to 2% to the insurance company s reserves. Challenges for insurance companies in 2009 Capital is scarce Many financial institutions are facing weakened balance sheets. In an environment of scarce capital, insurance companies may require a higher return on capital on capital intensive products such as pension buyouts. This is likely to translate into higher prices. For example, in their year-end announcement in March 2009, Legal & General stated Balance sheet strength remains our priority in 2009 We will be selective about sales growth and are reducing new business capital strain Tougher reserving At the year-end several insurance companies tightened their reserving allowance for defaults on their corporate bond portfolios. A review of financial regulation in light of the banking crisis is likely which could lead to further reserving pressure. Higher reserves will, in principle, mean greater security but will also mean higher prices. New reporting standards From the end of 2009 many large European insurance companies will report under a new Market Consistent Embedded Value (MCEV) approach. In effect this requires them to mark their liabilities to market using a risk-free discount rate. This is bad news for insurance companies who invest in corporate bonds as previously they have taken credit for some of the additional return expected from corporate bonds. For example, Aviva reported a 885 million loss in 2008 under international standards but under MCEV this loss increased to 7,710 million. Recently there have been reports that the introduction of MCEV may be delayed. 29

32 Appendix 3: Pension Buyouts 2009 APPENDIX 3 Longevity hedging mechanisms an overview Longevity hedging solutions have developed along two distinct paths: bespoke and index-based hedging. A bespoke longevity hedge transfers longevity risk for the members covered to the hedge provider. The provider agrees to meet the actual payments to pension plan members regardless of how long they live this is called the floating leg of the hedge. In exchange, the pension plan meets a fixed schedule of payments to the provider this called the fixed leg of the hedge. With a bespoke longevity hedge in place, a pension plan is no longer exposed to the risk that members live longer than projected. Payments ( pa) Floating leg Fixed leg The pension plan pays this regardless of how long members live The hedge provider pays pensions due to members which could be greater or less than the fixed leg Time (years) Annual pension plan payments with and without a longevity hedge Whilst highly effective, bespoke longevity hedges are normally only available for relatively large pension plan populations, as the hedge provider will look for enough member data to price the hedge efficiently. Competitive hedge pricing is available to pension plans with pensioner liabilities over 100 million this is significantly above the entry level for buyout. Also, providers will typically offer bespoke hedging for pensioners only, or pensioner-rich memberships. An index-based longevity hedge provides protection against future increases in longevity, but only based on the general population and not the specific pension plan membership. This allows the provider to assess an efficient price for the hedge, regardless of the size of the pension plan. However, index-based hedges have two main disadvantages: The pension plan is left holding an uncertain and indeterminable risk: that movements in pension plan member longevity are not in line with those of the index population; and Such hedges typically only offer protection for a relatively limited period (usually between 10 and 30 years) whereas pension plans are often more concerned about longer-term risks. These uncertainties present a substantial challenge to providers seeking to develop a market for index-based hedging instruments with pension plans. As a result, bespoke hedging is often seen as the more attractive option by pension plans seeking to transfer longevity risk. By contrast, financial institutions generally view index-based hedging more favourably as a means of trading longevity risk between institutions. The flexibility of an index-based hedge is attractive to them and, with large pools of lives on their books, they expect their pensioner longevity experience to closely match that of the index population. 30

33 Appendix 3: Pension Buyouts 2009 Regulation of longevity hedges: insurance regime versus capital market regime Longevity hedging for pension plans is presently available from a range of providers, primarily investment banks and insurance companies. APPENDIX 3 Unlike the buyout market, where the focus has been on FSA-regulated insurance vehicles, some of the key providers of longevity hedging do so through a capital market solution typically a swap. The key difference between the two competing frameworks is the management of counterparty risk: Capital market providers put collateral arrangements in place, whereby the two parties (ie pension plan and provider) stake assets to protect the other against any financial loss expected to arise from a default. Insurance companies are not required to put collateral arrangements in place. Instead they have the stronger capital reserving requirements of the FSA insurance regime, with the option of putting collateral arrangements in place where desired. Regulation in the longevity market may develop differently from the buyout market, with room for both capital market and insurance solutions to prove successful. As a precedent for this, interest rate swaps and inflation swaps are in widespread use by pension plans under the capital market route. One reason why capital market solutions may succeed here is the level of counterparty exposure under a longevity hedge compared to buyout. The following chart shows the maximum potential loss a pension plan would face (on 1 billion of pensioner liabilities) were a provider to default on its contractual obligations under a longevity swap and a buy-in respectively. In practice, any compensation from the Financial Services Compensation Scheme would significantly reduce the counterparty exposure under a buy-in. Level of counterparty exposure under a pensions buy-in and longevity hedge As can be seen, there is only limited counterparty exposure under a longevity hedge, compared with buy-in. Further, a longevity hedge is symmetric with either party potentially exposed to counterparty risk, depending on whether members live longer or shorter than expected. We see strong benefits from the development in parallel of longevity solutions from both insurance and capital market providers. We expect competition between the two frameworks to drive further innovation and possibly pricing, as providers seek to neutralise any disadvantages (perceived or real) arising from the particular framework in which they operate. 31

34 Appendix 4: Pension Buyouts 2009 APPENDIX 4 Publically announced transactions in excess of 100 million over 2008 and Q Name Value milion Sector Insurer Date Type Thorn 1,100 Engineering Pension Insurance Corporation December 2008 Full buyout Cable & Wireless 1,050 Communications Prudential September 2008 Pensioner buy-in Rank 700 Leisure Rothesay Life (Goldman Sachs) February 2008 Full risk transfer Delta 450 Engineering Pension Insurance Corporation June 2008 Pensioner buyout Powell Duffryn / PD Pension Plan 400 Engineering Paternoster March 2008 Full buyout Friends Provident 360 Financial Services Aviva (formerly Norwich Union) April 2008 Pensioner buy-in BBA 270 Aviation Legal & General April 2008 Pensioner buy-in TI Group 250 Engineering Legal & General March 2008 Pensioner buy-in TI Group 250 Engineering Paternoster September 2008 Pensioner buy-in Leyland DAF 230 Vehicle Manufacturing Pension Insurance Corporation January 2009 Full buyout Pensions Trust 225 Charities Paternoster July 2008 Pensioner buy-in M-Real Corporation 180 Paper Manufacturing Legal & General March 2008 Full buyout Morgan Crucible 160 Engineering Lucida March 2008 Pensioner buy-in Ofcom 150 Public Legal & General July 2008 Pensioner buy-in Dairy Crest 150 Food Producer Legal & General December 2008 Pensioner buy-in Vivendi 130 Communications MetLife November 2008 Pensioner buy-in West Ferry Printers 130 Printing Aviva (formerly Norwich Union) September 2008 Pensioner buy-in Source: LCP research

35 Appendix 4: Pension Buyouts 2009 Business written by insurers Total size of transactions ( million) Insurer Date of entry Q1 Q2 Q3 Q4 Q1 Total Market Share ve & 2009 Q1 Legal and General ,444 28% Pension Insurance Corporation October , ,902 21% Prudential , ,125 13% Paternoster June ,061 12% Aviva (formerly Norwich Union) May % Rothesay Life (Goldman Sachs) July % MetLife July % AEGON January % Lucida November % AIG Life April % Total 2,208 1,705 2,072 1, ,817 Note: Prudential did not provide any figures for their 2009 quarter one business volume. Source: LCP research 2009 APPENDIX 4 33

36 Glossary: Pension Buyouts 2009 All risks transfer A full buyout transaction where the insurance company assumes responsibility for all the risks borne by the pension plan such as incorrect data risk, GMP equalisation risk and other legislative risks. Auction process A competitive process where insurance companies bid to enter into exclusive negotiations with the trustees for a buyout or buy-in contract. Bespoke longevity swap A swap which is linked to the longevity experience of the actual pension plan membership. The counterparty will pay the additional pension payroll if the underlying members live longer than expected; the pension plan will pay the additional pension payroll if the underlying members die sooner than expected. Bulk annuity Describes a contract between a pension plan and an insurance company, whereby an insurance company insures some or all of the liabilities of the pension plan. Depending on whether the short-term intention is to transfer policies into the names of individual pension plan members, bulk annuity contracts are referred to as buyouts or buy-ins. Buy-in The purchase of a bulk annuity contract with an insurance company as an investment to match some or all of a pension plan s liabilities, and therefore reduce risk. Crucially the liabilities remain in the pension plan and the trustees retain responsibility for them. Commonly this covers the pensioner liabilities as a pensioner buy-in but there have been several buy-ins of non-pensioner liabilities or a sub-set of pensioner liabilities. Buyout The process whereby a pension plan s liabilities are transferred to an insurance company using a bulk annuity contract and the obligation for the pension plan to provide those benefits is ceased. Usually this covers the full liabilities of the pension plan as a full buyout and is followed by the wind-up of the pension plan. The definitions listed below focus specifically on pension plan de-risking terminology. This guide and the information it contains should not be construed as being advice from LCP and should not be relied upon as such. Specific professional advice should be sought to reflect individual circumstances. Buyout market A term to encompass the range of solutions available to transfer risk from a pension plan to another institution, usually an FSA regulated insurance company. Risk transfer is typically achieved through a bulk annuity contract (see buyout and buy-in) or a longevity swap contract. The term is sometimes taken to include noninsured buyouts. Closure An action to restrict the future build up of liabilities in a pension plan. It could be restricted to closing the pension plan to new members or be extended to stopping accrual. Stopping accrual usually means that current active members become deferred members, sometimes with a link to future increases in their salary. Collateral Assets specifically set aside or earmarked to reimburse one party for the default of a counterparty (eg an insurance company or bank). Collateral is sometimes built into the structure of larger buy-in contracts and swaps to provide additional protection to the trustees. Counterparty risk The risk for a given party that the other party (eg an insurance company or bank) defaults on its obligations. Mechanisms such as posting collateral can sometimes be negotiated to reduce the potential impact of this risk. DIY buyout The process whereby a pension plan purchases inflation, interest rate and longevity swaps to achieve similar levels of risk transfer to a buy-in or buyout. It is sometimes called a synthetic buyout. Financial Services Compensation Scheme (FSCS) A statutory compensation arrangement funded on a pay-as-you-go basis by an annual levy on the financial services industry. It is expected to provide broadly 90% compensation on annuity contracts in the event of an insurance company defaulting. Full buyout A buyout contract covering all known liabilities in a pension plan, usually followed by the pension plan winding-up.

37 Glossary: Pension Buyouts 2009 GMP equalisation The process of adjusting pension plan benefits to allow for the inequality in the definition of Guaranteed Minimum Pensions (GMPs) between males and females. The practicalities of this can be complex. Some insurance companies will provide an indemnity against a future legal requirement to equalise GMPs as part of a bulk annuity transaction. Hedging Purchasing assets that have similar characteristics to the pension plan s liabilities, so that if the value of the liabilities rises/falls this is matched by a similar rise/fall in the value of the assets. Index-based longevity swap A swap where the actual payout is linked to a standard population. For example, the counterparty may pay out to the pension plan if the longevity of the standard population improves faster than anticipated. Index-based swaps are flexible, but provide only partial longevity protection against actual pension plan experience. In-specie asset transfer The transfer of some or all of the pension plan s assets directly to the insurance company to pay the premium for the buy-in or buyout contract. This can sometimes provide a saving compared to paying the premium in cash owing to the reduced transaction costs involved. Pensioner existence exercise An exercise to ensure that all the people the pension plan is paying pensions to are still alive. This can either be done by writing to members or through a specialist agency. Pricing basis The basis used by insurance companies to price buy-ins or buyouts. Contrast to reserving basis. Profit share A provision in a bulk annuity contact for the insurance company to make payments to the trustees, or to an agreed third party, if the experience under the contract is better than anticipated in the insurance company s pricing. Progressive or staged risk transfer A buyout or buy-in transaction which is completed in several stages, often as part of a pre-determined premium payment plan based on asset performance. This allows risk to be transferred when the pension plan can afford to do so. Reserving basis The basis used by insurance companies to calculate the reserves they must hold. These will generally be based on prudent assumptions and will have regard to FSA rules. It will generally be much more prudent than the pricing basis. GLOSSARY Liability Driven Investment (LDI) A specialised investment (usually made up of cash and swaps) designed to have a similar cashflow profile to a pension plan s liabilities. So, if the value of the liabilities increases the value of the investment also increases. This is a type of hedging. Liability management The process of taking active steps to manage the risk involved with a pension plan s liabilities. Practical examples include transfer value exercises, pension plan closure or conducting a trivial commutation exercise. Longevity hedge The purchase of an investment to remove the risk of pension plan members living longer than expected. The main way of hedging longevity risk, other than buying annuities, is to use a longevity swap. Longevity swap A tool to enable pension plans to transfer the risk of members living longer than expected to a third party (the counterparty), whilst retaining direct control of the assets. The two main types of longevity swap are a bespoke longevity swap or an index-based longevity swap. Mono-line insurance company An insurance company offering products within a single business line, such as bulk annuities. Residual longevity risk The risk of members living longer than expected that is not covered by an index-based longevity swap. The residual risk is due to differences between the pension plan membership and the standard population. Ring-fencing A type of security arrangement under a buy-in, where certain assets backing a pension plan s liabilities are only available for the benefit of that pension plan rather than other policyholders. Solvency capital The additional capital that an insurance company must set aside, in addition to the premium paid, when writing a buyout or buy-in. This provides a buffer against adverse future experience. Standard population The underlying population used to determine the payouts under an index-based longevity swap for example the population of England and Wales. Swap An agreement with a counterparty (often an investment bank) to swap types of liability exposure. For example, under an inflation swap a pension plan pays the bank if inflation falls compared to expectations, but the bank pays the pension plan money if inflation rises. This hedges the pension plan s inflation risk. Multi-line insurance company An insurance company that writes business across a range of lines of business (eg investment management and other insurance products). Non-insured buyout A transaction that transfers risk by changing the relationship between the pension plan and the current sponsoring company. Non-insured buyouts do not involve insurance companies and so do not benefit from the associated protections of the insurance regime. Due to lower capital requirements they can be more affordable than a bulk annuity or longevity swap. Partial buy-in / buyout A buy-in or buyout covering only a proportion of a pension plan s liabilities. The most common type is a pensioner buy-in. Pensioner buy-in A buy-in which covers payments to current pensioners and their dependants. Synthetic buyout See DIY buyout. Transfer value exercise An exercise where deferred members (and sometimes also active members) are given the opportunity to transfer their benefits out of the pension plan. An enhancement is often offered above the pension plan s standard transfer terms, either to the transfer value itself or as a cash payment outside the pension plan, to make it more attractive for members to transfer. Trivial commutation exercise An exercise to commute small pensions in the pension plan for a cash lump sum. This can both reduce risk and save on future administration costs. For a full list of our services see 35

38 Pension Buyouts 2009 Notes 36

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40 UK Professional Pensions Awards Actuarial Consultancy of the Year Investment Consultancy of the Year 2007 FT Business Pension & Investment Provider Awards Actuarial Consulting Investment Consulting Corporate Adviser Awards Best Member Communication Strategy 2008 Best use of Technology by a Corporate Adviser 2008 Best Strategy for Investment Advice on Pensions 2009 UK UK Belgium Ireland Jersey Netherlands Switzerland Switzerland Lane Clark & Peacock LLP 30 Old Burlington Street Lane Clark & Peacock LLP St Paul s House Lane Clark & Peacock Belgium CVBA Lane Clark & Peacock Ireland Limited Lane Clark & Peacock LLP * Oriel House Lane Clark & Peacock Netherlands B.V. LCP Libera AG Stockerstrasse 34 LCP Libera AG Aeschengraben 10 London W1S 3NN St Paul s Hill Marcel Thirylaan 200 Office 2 York Lane, St Helier Galghenwert (9th floor) Postfach Postfach Tel: +44 (0) Winchester Avenue Marcel Thiry 200 Grand Canal Wharf Jersey JE2 4YH Herculesplein 40 CH-8022 Zürich CH-4010 Basel Fax: +44 (0) Hampshire SO22 5AB B-1200 Brussel South Dock Road Tel: +44 (0) AA Utrecht Switzerland Switzerland Tel: +44 (0) Bruxelles, Belgium Dublin 4 Ireland Fax: +44 (0) Netherlands Tel: +41 (0) Tel: +41 (0) Fax: +44 (0) Tel: +32 (0) Tel: +353 (0) Tel: +31 (0) Fax: +41 (0) Fax: +41 (0) Fax: +32 (0) Fax: +353 (0) Fax: +31 (0) The firm is not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services to clients because we are members (as defined under the Act) of the Institute of Actuaries, a Designated Professional Body. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide. All rights to this document are reserved to Lane Clark & Peacock LLP. This report may be reproduced in whole or in part, without permission, provided prominent acknowledgement of the source is given. LCP is a limited liability partnership registered in England and Wales with registered number OC LCP is a registered trademark in the UK (Regd. TM No ) and in the EU (Regd. TM No ). All partners are members of Lane Clark & Peacock LLP. A list of members names is available for inspection at 30 Old Burlington Street W1S 3NN, the firm s principal place of business and registered office. The firm is regulated by the Institute of Actuaries in respect of a range of investment business activities. LCP is part of the Alexander Forbes group of companies, employing over 4000 people internationally. A member of the Multinational Group of Actuaries & Consultants. Main offices in: AFRICA ASIA AUSTRALIA EUROPE AND NORTH AMERICA * No regulated business is carried out from this office