Buyouts. Thomas Olunloyo, Pricing and Product Development Actuary MetLife Assurance. PP Pensions Academy November 2012

Transcription

1 Buyouts Thomas Olunloyo, Pricing and Product Development Actuary MetLife Assurance PP Pensions Academy November 2012

2 Agenda Introduction to buy-ins and buyouts Recent market activity Preparing for a buy-in or buyout Effect of financial markets on pricing Making buy-ins and buyouts work for you

3 Buy-ins and buyouts: the market The pace of de-risking activity in 2010 and 2011 was high has been a slower year Source: LCP Pension Buy-ins, Buy-outs and Longevity Swaps 2012

4 Buy-ins and buyouts: the market Interest in longevity only transactions has increased for large schemes Source: JLT Pension Capital Strategies Buyout Market Watch March 2012

5 Buy-ins and buyouts: the basics Buy-in Buyout Liabilities remain on balance sheet but are matched Retain flexibility to manage benefits within the scheme Can be part of phased buy-out strategy May not require additional funding Reporting and monitoring processes need to be established for accounting and administration A strategy for residual liabilities and assets needs to be defined Liabilities are removed from balance sheet Reduced on-going risk, cost and management time and expense Significant management time needed for implementation Likely to require additional funding Future top-ups are difficult (e.g. for discretionary increases) Technical issues with partial solutions such as member equality and discharging GMP liability

6 Buy-ins and buyouts: preparation Feasibility is it a good idea? Data and benefit review accurate and competitive pricing avoiding aftershocks trustees can be personally liable Agree investment strategy should assets be de-risked in advance? Organisation clear objective, triggers and budget can decisions be made quickly?

7 Buy-ins and buyouts: trigger based mechanisms Scheme Flight path to buyout Investment de-risking Liability reduction Employer covenant Employer Scheme valuation Analyst valuation M&A activity Union negotiations Legislative Accounting standards IORP Directive GMP equalisation CPI / RPI Financial Market expectations for future inflation Long term interest rate changes Corporate bond yields increase Equity market gains

8 Buy-ins and buyouts: pre-implementation and implementation

9 Buy-ins and buyouts: driven by the markets Pricing is significantly influenced by three market components Interest rates Lower price Inflation Higher price Bond yields Lower price

10 Rate Buy-ins and buyouts: driven by the markets The market rates that affect pricing can be volatile over short periods of time 7.00% Market Conditions Movements 6.00% 5.00% 4.00% 3.00% 2.00% Corporate bond spreads Inflation swap rate LIBOR swap rate 1.00% 0.00%

11 Buy-ins and buyouts: further solutions Age / amount grouping of liabilities Old age pensioners Only those over SPA Etc. Enhanced annuities Detailed mortality data for use in assumption setting Pre-purchase on an individual basis Deferred buyout Deferral of period Deferral of premium Use of company property / assets Contingent assets Conditional assets Active member protection Buy-in Buyout

12 Buy-ins and buyouts: small schemes Why? Risk pooling random volatility is a key driver of costs On-going expenses Consultancy models Expedited processes Fixed fee models Insurance solutions Limited providers Proportionate response Out of market risk

13 Thomas Olunloyo, MetLife Assurance Questions? Thomas Olunloyo (44)

14 Disclaimer: The materials in this pack have been prepared to provide a general outline of the issues covered. Copyright in the materials is owned and retained by MetLife Assurance Limited and any form of copying, reproducing, disclosure or distribution of the message or any attachments are strictly prohibited. The information is not intended as an offer or solicitation to buy or sell any financial instrument. All comments and statements are to be considered the opinions of the author not the company and are not intended to be relied upon METLIFE, INC. MetLife Assurance Limited is a wholly owned subsidiary of MetLife, Inc. and is authorised and regulated by the UK Financial Services Authority. MetLife Assurance Limited is registered in England and Wales with company number Registered Office: 15 BV15 Bedford Street, London WC2E 9HE.