Risk Settlement Market 2016

Transcription

1 Aon Hewitt Risk Settlement Group Risk Settlement Market 2016 Navigating risk reduction for pension schemes of all shapes and sizes Risk. Reinsurance. Human Resources.

2 Table of contents Executive summary...4 Opportunities... 6 Bulk Annuities Over 30bn of risk transferred to bulk annuity and longevity swap providers in 2015 The bulk annuity market... 8 Medically underwritten bulk annuities No space for smaller schemes? The Aon Client Promise Pathway The future of the bulk annuities market A secondary annuity market Liability settlement Longevity swaps Medically underwritten market rapidly approaching 2bn Longevity swap market in Myth buster: a longevity swap is not a barrier to annuity purchase Mid-market longevity hedging Longevity swap structures Longevity risk bulk annuity providers actively quoting in 2016 Aon Hewitt have bulk annuity and longevity swap solutions for schemes of all sizes Settlement overseas Meet the team Contacts For more information visit aonhewitt.co.uk/risksettlement In July 2015, Paul Belok, a partner in Aon Hewitt s Risk Settlement Group led the advice to Civil Aviation Authority Pension Scheme (CAAPS) for its 1.6bn buy-in completed with Rothesay Life. In our video (right) we are delighted to have Joanna Matthews, Independent Chair of Trustees, and Jeff Butler, Pensions Director, sharing their insights into what made the CAAPS buy-in so successful and their top tips for trustees and sponsors considering purchasing a bulk annuity contract. 2 3

3 Executive summary What were the highlights of 2015? 2015 showed that the settlement market continues to go from strength to strength, both in terms of capacity and innovation. It was another bumper year for transaction volumes in both the longevity swap and bulk annuity market, with total transactions exceeding 30bn. Longevity swap providers had their most innovative year to date, using a variety of structures to facilitate cost effective risk transfer, as well as providing hedging solutions to more than just the mega-schemes. The bulk annuity providers also continued to develop both innovative products and broking services (ranging from bespoke solutions to streamlined approaches) again covering deals of all shapes and sizes. What were the highlights for Aon Hewitt? What are your predictions for 2016? We are expecting significant growth in Bulk annuity providers have stated that they have capacity to deliver another record breaking year and with new entrants in the market we anticipate some terrific opportunities from competitive auctions. The longevity swap market is also set for another bumper year with significant demand already from pension schemes seeking to hedge their demographic risk and insurers continuing to transfer risk in relation to their backbooks and new business (itself a mixture of bulk and retail business). Aon Hewitt are leading the way in 2016, having already completed a 900m bulk annuity transaction. What impact is Solvency II having on the bulk annuity market? What are the key themes for pension schemes in 2016? Whether your long term plan is to annuitise externally using insurance capacity or to adopt a self-sufficient strategy (with a targeted level of risk), there are significant benefits to getting your house in order now! It will be critically important to be ready to capture settlement opportunities as part of your de-risking journey as and when opportunities arise. Any decisions should be made with a comprehensive understanding of the all the options available in the market. Many pension schemes are already focusing on this and we anticipate many more will turn their attention to this in You may not be as far away from your long term objective as you think Can settlement opportunities help accelerate my de-risking journey? Yes, you may not be as far away from your long term objective as you think when taking into account settlement opportunities, contributions committed to the scheme, and/or liability management options. For example, we have seen a large number of schemes reshape their liabilities through liability management exercises (e.g. a pension increase exchange) to a more attractive format for annuity providers and achieve better pricing. Some have used partial or medically underwritten buy-ins to achieve returns in excess of those available from other low risk assets with the added benefit of removing longevity risk. In this evolving market, Aon Hewitt is well placed to help trustees and sponsors navigate the settlement market to find the solution that best At Aon Hewitt we achieved great success in the both the medically underwritten and traditional bulk annuity market, led by our key services AHEAD (our platform for collecting medical data for quotations) and Pathway (our streamlined bulk annuity service). We really drove the growth in the medically underwritten market, claiming virtually every record as lead adviser: the most, the largest, and the quickest. Leading advice on the 1.6bn buy-in for CAA was definitely a highlight in 2015 (see video on page 3 for details), and demonstrated that we are more than equipped to deal with transactions of any size or complexity. Similarly, in the swaps market, we facilitated the transfer of over 7bn longevity risk, maintaining our position as lead adviser in the market. We have seen a relatively sluggish start to 2016 but we are confident that this is temporary bulk annuity providers are still finding their feet following the introduction of Solvency II and pricing is not quite at the levels seen last year. The demand is there both from schemes wanting to secure their liabilities and insurers looking to write new business. We believe that Solvency II will continue to drive innovation as providers find new ways to remain competitive and appealing within the restrictions of a new regulatory framework. How important is clean data? Clean data is a great step to clarifying your risk exposure. Regardless of your expected journey, understanding your obligation to pay future benefits will allow you to plan more appropriately. Should you wish to make use of insurance solutions, it is also a very strong indicator to the market that you are committed to a transaction and is likely to result in better pricing being achieved. It will become critically important to be ready to capture settlement opportunities as part of your de-risking journey as and when opportunities arise. meets their needs in particular, we pride ourselves in being implementation neutral finding the right solution, whatever that may be. Please contact a member of the team if you would like to hear more about how we can help you achieve your de-risking objectives. Martin Bird +44 (0) martin.bird@aonhewitt.com Growth in the medically underwritten market Leading advice on the 1.6bn buy-in for CAA Facilitated the transfer of over 7bn longevity risk Lead advisor on the 230m Kingfisher buy-in, the largest ever medically underwritten transaction 4 5

4 Opportunities Are you missing settlement opportunities on your de-risking journey? De-risking journeys for pension schemes are now commonplace. Known by a number of names flight plan, journey plan, trigger setting they all typically have a common aim of funding on a buy-out or low-risk self-sufficiency basis. Most of these plans involve exchanging growth for matching assets according to a predefined trigger mechanism. However, by simply following growth to matching de-risking journeys, we question whether schemes are missing out on key de-risking opportunities through partial or medically underwritten buy-ins, longevity hedging, or liability management. When de-risking triggers are hit, through strong investment returns or contributions, growth assets are typically sold and invested in gilts, bonds, or even an LDI portfolio with the aim of hedging risk. Trustees and sponsors should rethink this and ask themselves: Is this the most sensible thing to do in the context of insurance market pricing? Is there an opportunity to achieve a return above gilts while also removing the added risk of longevity? We are increasingly seeing demand from pension schemes and sponsors to integrate the monitoring of strategic opportunities with their more traditional growth to matching de-risking plans. We question whether schemes are missing key de-risking opportunities Monitoring settlement and investment opportunities With live pricing feeds from insurers now universally available across the market, it has never been easier for trustees and sponsors to identify the opportune moment to approach annuity providers. In addition, many pension schemes regularly monitor their investments against pre-determined de-risking triggers as well as their interest rate and inflation hedging coverage on a daily basis. The monitoring of opportunities as part of investment decisions and your wider de-risking strategy fits neatly into that framework. Our online risk analytics platform, Risk Analyzer, enables trustees and sponsors to monitor annuity pricing on a live daily basis. Combining this with other de-risking investment options and the implications of liability management exercises will ensure no opportunity is missed. Risk Analyzer helping you to ensure no opportunity is missed What do we mean by opportunities? Key strategic opportunities that trustees and sponsors are increasingly looking to explore on their de-risking journey include: Obtain returns in excess of gilts Phased buy-in Hedge longevity risk Top slice most significant liabilities Medical underwriting Use medical data to improve pricing Have you considered a delegated approach? Some trustees and sponsors are looking to take this a step further through a delegated approach, whereby both strategic and investment objectives are agreed upfront and then implemented by a fiduciary manager working closely with settlement advisors throughout. Aon Hewitt s Implemented Annuities service via our Delegated Consulting Services platform is the only fiduciary investment management offering in the market to provide a delegated approach on the implementation of both your investment strategy and your de-risking objectives in line with pre-agreed parameters. See our brochure here for more detail Martin Bird +44 (0) martin.bird@aonhewitt.com Longevity hedging Liability management Protect against increasing life expectancy Matches unrewarded risk Reshape or reduce liabilities Risk sharing with members 6 7

5 The bulk annuity market Insurance market poised for rapid growth Total market size Bulk annuity volumes pushed through the 10bn barrier in 2014 and 2015, with 13.2bn and 12.3bn placed respectively demonstrated the market s resilience. Providers were busy preparing for the new Solvency II regulatory regime, which took effect on 1 January A lot of work went into rethinking business models for managing risks in their annuity books, ahead of applications to their regulator, the Prudential Regulatory Authority, for approval of the insurer s models. These models drive reserving, pricing and investment strategies. The long-term size of the UK individual annuity market remains unclear post- Pensions Freedom, but has clearly shrunk since Now that the Solvency II rules are clear, more insurers will be considering whether to compete in the growing bulk annuity market. It is a challenging time. Volatility in stock markets since the summer of 2015, and the continuing low yields experienced going into 2016, resulted in typical scheme funding levels showing no marked improvement despite sticking to deficit funding plans. We believe that a significant increase in demand will arise once market conditions improve again, and that a market of 20bn or more will be required in the next few years. This will, in particular, lead to an increase in demand for full scheme buyouts, as the cost of operating legacy schemes starts to become less justifiable. Are the floodgates going to open from just a modest improvement in yields? In the meantime, the market will continue to be dominated by requests to secure pensioners specifically, at prices that are often close to the existing funding reserves. Indeed, in 2015 we secured 2bn of pensioner annuities for two organisations, the Civil Aviation Authority and for Alcatel-Lucent, at pricing that gave a profit against funding reserves while facilitating a material reduction in risk. We also secured very favourable pricing in the new market for medically underwritten bulk annuities. Click here Aon has smoothly managed all aspects of the transaction as well as keeping us informed and ready to act very quickly to seize the opportunity. Martin Couzens, Chairman of Alcatel-Lucent Pension Trustee Limited Solvency II Insurer activity behind the scenes: Longevity Reinsurance A material increase in deals to pass longevity risk onwards from the insurer to the reinsurance market, with over 10bn of risk transfer arranged in 2015 alone. With market capacity growing in 2016, relatively few annuity providers are expected to bear all of the risk from new deals themselves; Asset Strategy An ongoing review of asset strategy, to consider whether changes in allocations between corporate debt and a range of other less liquid incomebearing asset classes will optimise returns under Solvency II; Corporate Structure Providers are reviewing the business lines and territories across which they will compete going forward. Scottish Widows, for instance, combined a range of life companies into one, now called Scottish Widows Limited. Bulk annuity business written with UK pension schemes Value of deals Other Partnership Just Retirement Lucinda Metlife Scottish Widows Aviva Prudential PIC Rothesay Life/Patemoster L&G 14,000 12,000 10,000 8,000 6,000 4,000 2, Year 2015 was unusual in several respects, with two trends the first a short-term one developing in the latter part of the year: There were an unusual number of full scheme buyouts in the last quarter particularly, in a market typically still dominated by pensioner only transactions because of the size of overall scheme deficits. This reflected a move by some sponsors to fund a buyout before it was expected to become more expensive, with prices rises anticipated from Solvency II taking effect on 1 January Between them, Aviva, Legal & General and PIC disclosed an unusually high total of 42 completed buyout transactions in this quarter. By far the largest was the 2.4bn PIC transaction for Phillips, representing the rest of a scheme previously partly insured with Rothesay Life and Prudential, with the total of 3.5bn secured overall making it the biggest scheme to attain full security yet. Medically underwritten annuities represented 12% of the bulk annuity market volume over 2015, up from 5% in 2014, and almost 30% of the number of deals completed (52 out of 175). This reflects pricing which was often substantially better than that available elsewhere in recent years. The remaining transactions in the market were largely pensioner buy-ins, with a competitive market of up to nine different bidders offering favourable price opportunities over the year. The first transactions for Scottish Widows and Canada Life were important for showing market capacity for 2016 and beyond Increasingly, the settlement market is global. Insurers can seek bulk and individual annuity business, and also consider buying books of annuities from other insurers, with the forthcoming secondary annuity market increasing opportunities for accessing existing annuity books. In April 2016, Rothesay Life announced their purchase of 6bn annuity portfolio from Aegon covering 187,000 policyholders. The reinsurance market stands behind these direct writers, and serves pension schemes and insurers in the UK, US and other territories. Pricing and appetite is driven by the interaction between these different markets. Want to know more about Global insurance activity? Click here 8 9

6 Distribution by insurers Business placed has been concentrated on five insurers in recent years, largely those that will compete for the largest individual deals. Distribution of annuities: Pie chart business placed by provider over Prudential 10% Rothesay Life 20% Partnership 1% Just Retirement 3% Aviva 8% Scottish Widows 1% Other 0% L&G 28% Phased buy-ins Some schemes have been securing their liabilities in a series of pensioner buy-ins over several years. Historically, many schemes automatically secured pensioners under annuities as they retired. Since the bulk annuity market expanded from 2007, and some of the larger schemes have closed to further benefit provision and then matured, the trend to instead secure larger bulk transactions from time to time has grown. For example, we helped Smiths Group complete four bulk purchases over , and some other large organisations have followed suit with, for example, ICI and Phillips securing a series of annuities in recent years. Over time more schemes will be able to free up assets for annuity purchase in stages. The case for holding gilts is often less compelling than a bulk annuity given the need to maximise risk control. Many schemes invest in LDI, which can cause complications for switching to an annuity investment but these are often resolved as schemes mature and reduce the actively return-seeking investments in their portfolio. Benefits of a phased buy-in Just part of a traditional asset strategy logical next step in the sequence of growth to gilts to LDI to annuities! Choose the best transaction size secure a portion of the pensioner population that minimises operational disruption whilst maximising provider interest; Top slicing of the highest liabilities has its own perks a reduction of concentration risk can potentially be secured at a great price with medical underwriting Click here and One buy-in facilitates another forming a contractual relationship the annuity market, and demonstrating conviction to de-risking will put you at the front of the queue. PIC 29% Paul Belok +44 (0) paul.belok@aonhewitt.com Note: Rothesay Life and L&G totals include business placed by companies whose bulk annuity book they subsequently acquired. Scottish Widows only entered the market in is seeing more insurers entering the market, partly to replace lost individual annuity market revenue since the advent of the pensions freedoms. Acting the other way, Prudential have suggested that their bulk annuity volumes may not be maintained for 2016 onwards following the implications of the new Solvency II reserving requirements, and their increasingly global business model. These changes will alter the distribution of business going forward, and we expect more diversification between providers. Eight insurers actively quoting in

7 Medically underwritten bulk annuities A health check that could significantly improve the wellbeing of your scheme 2015 saw a further significant increase in growth of the medically underwritten bulk annuity market and cemented Aon Hewitt s role at the forefront of this exciting opportunity. Medical data collection Medically underwritten bulk annuity market volumes ( m) ,600 1,400 1,200 1, Includes non-underwritten deals from Just Retirement Aon Hewitt s AHEAD platform offers trustees a unique opportunity to access: A one-stop shop for delivery of the full project, giving you access to a complete service and greater certainty over delivery. Access to a well-known brand, giving members greater comfort. A track record of outstanding response rates giving you comfort that members do engage with AHEAD and a greater likelihood of better pricing. An engaging suite of communications. See more details in our AHEAD brochure here Aon Hewitt s unique AHEAD platform really did deliver during schemes worked with us to: Transact 420m of medically underwritten bulk annuities in 2015 around as much as the whole of the rest of the market together Achieve an average response rate of 85% from their members 20% greater than market averages, driving the great pricing realised by the schemes involved Invest in the largest ever medically underwritten buy-in: a Kingfisher s 230m ground-breaking transaction with L&G, top slicing the largest liabilities within the scheme Achieve an average price around 10% cheaper than traditional bulk annuity pricing AHEAD Your details Name Date of birth Gender Male Female Marital status Contact number address If applicable, please fill in your dependant s details below: Name Date of birth Gender Male Female Contact number General Practitioner s details Member Doctor s name Address Telephone No Transact the largest ever medically underwritten full scheme buy-out: Kuwait Petroleum s 42m transaction with Partnership Just Retirement and Partnership dominated the enhanced annuities market before L&G s record 230m transaction in Q Single Widowed Married Civil partnership Co-habiting Divorced Separated Financial dependant 1 of 4 Spouse/Named Dependant Doctor s name Address Telephone No Complete a transaction in just four weeks from the beginning of medical data collection to the signing of the contract Pricing Greater certainty from the medical data, asset opportunities and a hunger by insurers to continue to establish this market all contributed to the attractive pricing seen in We worked with schemes from 5m to over 2bn to capitalise on this opportunity, for both full scheme transactions and top slice exercises, where the largest lives are insured removing the concentration of risk to which reinsurers are most averse. Aon s Bulk Annuity Market Monitor below tracks the return available on traditional pensioner annuities relative to gilts a scheme may be holding. Compare that to the return achieved by our 10 medically underwritten transactions over 2015 marked with an X : Pensioners: implied return on annuities less gilt yield Additional return (bps p.a) Additional return (bps p.a.) X X X 100 X X X X X 50 X Annuities cheaper than gilts X Pricing reasonable for risk removed Annuities more expensive than gilts -40 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Note: The range shown is illustrative only, and gives an indication of the best possible pricing which might be achieved in particular circumstances based on Aon Hewitt s experience of recent transactions and wider market research. The pricing achieved gave these schemes an average additional return on their assets of 0.75% p.a. As we look towards the remainder of 2016, the impact of Solvency II and the reduction in competition from the Just Retirement/Partnership merger looks likely to impact pricing from the fantastic prices seen in However, for medical data collection to remain an attractive option to trustees, there needs to remain a pricing opportunity. The fundamental reasons underlying the pricing opportunity remain, and we are confident that this will continue to offer an attractive opportunity for many schemes, with even further growth of this market in Members of these schemes realised a range of benefits including: improvements in funding positions, materially greater returns on matching asset portfolios, additional benefits granted to members as a results of savings achieved, and extra security for members. John Baines Potential better pricing resulting from medical underwriting Indication of pricing spread We are confident that medical underwriting will continue to offer an attractive opportunity for many schemes +44 (0) john.baines@aonhewitt.com 12 13

8 No space for smaller schemes? Large transactions are dominating the world of bulk annuities or are they? In the past two years almost half the 25bn of bulk annuity contracts written have been for 1bn+ transactions. Six supersized deals consumed 50% of the market s capacity Mega buy-ins Deal size ( bn) EMI ICI 1 01/12/ /12/ /12/ /12/2015 However this is only part of the story. Total TRW CAA Philips Preparing for when the time is right It is no big secret that schemes are finding it hard to hit their funding targets in a depressed yield environment and sponsors are often unwilling to accelerate recovery plans. However, the desire to remove risk from balance sheets could not be higher. The annuities market is finely poised. Insurer capacity and appetite is potentially restricted, and yet, one small shift in yields, or an uptick in global markets could put settlement back on the agenda for everyone. Are you ready to beat the queue for when this happens? Look at feasibility now for the future: Establish the key decision-making criteria Resolve any barriers to transaction Review asset strategy prepare for annuities/swaps Clear plan of action Engage all stakeholders Determine a sensible budget for project Initial training make sure all stakeholders stay informed Clean and complete your data it will need doing eventually, why not now? Aon Hewitt s Global Pension Risk Survey found that: 49% of sub- 100m pension schemes have an ultimate target to buy-out This contrasts to 8% Only of 1bn pension schemes that are typically more focused on self-sufficiency Year Total bulk annuities 1bn+ bulk annuities 100m- bulk annuities bn 7.1bn 1.7bn bn 4.0bn 1.6bn Are smaller contracts still significant to insurers? The answer is a resounding yes. Around 150 transactions are written every year for less than 100m. This is a highly active area of the overall market that is rapidly innovating to deliver compelling risk settlement solutions driven by the anticipated demand from small schemes. Individual annuities Pooled solutions (insurers price a group of schemes together) Pre-agreed annuity contracts (to facilitate faster and more cost effective transactions) Medical underwriting Insurers and advisers are focused on delivering tailored solutions for smaller clients Premium loans (to facilitate earlier risk transfer where assets fall short of the required premium) A delegated approach (assets transferred and invetment / strategic objectives implemented in line with preagreed parameters required premium) Full risk transfer The desire to remove risk from balance sheets could not be higher Michael Walker +44(0) michael.walker.3@aonhewitt.com Agree the benefits to insure difficult decisions now means jumping the queue later Gather experience and marital data more data leads to better pricing Monitor the critical target regularly consider a daily platform like risk analyzer Structure your investments get set with annuity ready funds (click here to see our implemented annuities brochure for more detail ) Liability management transfer value exercises help reshape the risk profile (see here ) 14 15

9 Case study The Aon Client Promise Pathway 40m buy-out for a US parent company that recently acquired three UK DB pension schemes as part of a multi-$bn corporate transaction. Market opportunities can come and go quickly. While thoroughness is critical to ensure a smooth transfer of risk to the annuity market, speed can be very important too at the right stages. Partnership To ensure the objectives of key stakeholders were met, Aon Hewitt worked closely with the trustee/company joint working group as well as the scheme advisers throughout. Expertise The three schemes included DC sections, DC sections with DB underpins, partially insured existing annuities, Barber issues. Aon Hewitt drew upon specialist team expertise (eg, DC and wind up) to deliver results. Innovation Due diligence on all insurers considered both in terms of financial strength and administration capabilities. Aon Hewitt is the only adviser in the market to offer comprehensive due diligence advice as part of its standard bulk annuity broking service. Pathway is Aon Hewitt s tested solution for streamlined bulk annuity transactions, with a 100% conversion rate to date for schemes seeking to transact using our service. We believe this offers the most complete service of its kind, and it has already been used for transactions with most of the insurers in the market. It is suitable for any kind of bulk annuity deal, be it underwritten or even full buy-out of a hybrid scheme. A key part of our service, developed in conjunction with law firm Eversheds LLP, is to offer pre-negotiated annuity contracts, removing much of the time taken to implement a transaction once a favourable quotation is obtained. Some of our transactions complete in a matter of days from agreeing the decision. This has supported transactions timed to coincide exactly with the purchase of a business, or to take quick advantage of a late increase in demand from an insurer at the end of a business quarter. Pathway is designed to consider the unique requirements of the transaction by linking the feasibility assessment and turning this into a packaged solution for resolving potential barriers; selecting the most appropriate insurance providers in advance; Key factors for speed Clear decision-making criteria Feasibility review before market approach Engage specialist adviser early on Early due diligence and training Joined-up team across scheme advisers Key needs for product features decided in advance Assets ready to trade Carefully targeted approach to market Realistic price target Provider capable of fast installation obtaining upfront due diligence, identifying financial strength, market commitment and administrative capabilities of all counterparties; and Excellence Pathway, our streamlined bulk annuity broking service with pre-agreed contracts managed to secure individual policies issued within six months and wind-up within nine months. Aon Client Promise Our commitment to ensure you recieve value and personal service. Results A competitive auction resulted in a lower company contribution than anticipated while also meeting the preferred deadline to maximise the corporate accounting benefit. engaging all advisers and setting clear project targets To avoid missing an opportunity, we commit to considerably tighter deadlines than would be possible without streamlining, and are keen to transfer risk as quickly as possible once the right deal and the choice of insurer is established. I have really enjoyed working with Aon Hewitt to design the Pathway service. We have removed risk very efficiently on buy-ins and buyouts, capturing opportunities as quickly as possible. The firm dedication and market knowledge of the Aon Hewitt team comes through strongly at all stages. For more information see our Pathway brochure here Dominic Grimley +44 (0) dominic.grimley@aonhewitt.com Hugh Gittins, Manager of Eversheds LLP s Bulk Annuity Services 16 17

10 The future of the bulk annuities market Providers continue show a keenness to adapt Solvency II The spectre of a new regulatory regime, with uncertainty over its impact on pricing and insurance provision, has been looming over the bulk annuity market for some years. The annuity market remains competitive Pensioner pricing has held up Full buyout prices will not stabilise quickly 1 January 2016 the Solvency II system is finally in place, removing most questions over the regulation of the insurance market. So what have we learned? Although the criteria for risk management in running an annuity book have been ratcheted up considerably, the market is in a healthy state, with up to nine insurers potentially competing for a scheme s business. Aside from the medically underwritten market, where a scheme s health information influences available pricing, pricing has remained stable. The best available 2016 pricing is similar to that available in 2014 and 2015, with asset opportunities arising for particular insurers in different months. Partly because of equity market jitters, and partly because of fears of annuity price rises for deferred members (members who have not retired), few schemes have sought accurate pricing for a full buyout since Solvency II arrived. While a price rise of perhaps 3% for deferred members has been widely anticipated, insurers pricing models will take time to settle. Market feedback on competitiveness in auctions, and provider experience of obtaining longevity reinsurance for deferred members, are key needs for stability in buyout market pricing. The opportunity The Government has offered pension freedoms to members of defined contribution (DC) schemes, allowing them to freely choose how they wish to use pension savings from the age of 55. In 2017, the Government wants to extend freedom to retired members already receiving income from an annuity. Their plan is to allow members to exchange their annuity for a cash payment, with the income from the stream then becoming payable to the new purchaser of the annuity. A purchaser is likely to insist on health information, given it does not know the circumstances leading to the member s desired sale. The providers A secondary annuity market The new buyers are expected to be other regulated UK financial institutions. This can include the original annuity provider offering to buy back its own product, reducing the size of the annuity book. But this may well suit insurance companies that are already experienced in pricing annuities using health information, particularly if this market proves less competitive than the existing annuity markets. Indeed, the growth of this market may encourage more annuity providers to gain medical underwriting capability. Current annuity providers will need to decide: whether to participate in this market as a seller; whether to offer terms to buy back their own annuities; whether to seek to buy annuities from other insurers. Control of risks taken on is now more tightly monitored Innovation continues to help schemes de-risk Providers need a team The key dynamics of the market are unchanged To avoid holding excessive capital to back annuities, each annuity provider has had to apply for matching adjustment approval from their regulator. To maintain approval, close alignment of cashflows from assets and benefit commitments must be demonstrated. Potentially increasing the motivation for pension schemes to optimize the shapre of their liabilities prior to approaching the market. Solvency II effectively prevents some previous contract structures. Providers have acted quickly to design replacements and to tackle as many obstacles as possible that may delay a transaction. Almost any cross-section of a scheme s liabilities can be secured at any time, and a substantial range of contract features are available. The management of an annuity book now requires a wide range of skills including specialist asset sourcing, access to reinsurance, risk modelling and control of the management costs of the new infrastructure required. This has increased the team needed to compete for bulk annuity sales, and means new market entrants will typically form a team by considering the recruitment of specialists at rival providers. The market continues to cope with current demand, while leaving a question of how a 10 15bn annual market size can secure the estimated c. 1.5trn of liabilities in UK company final salary schemes. The de-risking needs of other countries pension systems add to this imbalance. The message remains: de-risk when you can afford to, as there could be short-term gaps in capacity in future. The challenge Annuities secured by DB schemes will be eligible, but only if they are held in the member s name. Many bulk annuities are instead held as assets of the trustees, and are only expected to be allocated to particular pensioners when all scheme members have been insured. Hence trustees will need to secure communications to members from 2017, explaining this distinction. There are plenty of challenges with developing this new market, including tracking future deaths, passing on risk further to the wider capital markets, helping less informed customers to avoid accepting poor pricing, and establishing an acceptable level of charges for what is a complicated financial transaction. The resale value of annuities may prove to be materially different to the price paid, because of health information, or because of changes in market conditions over time. Assessing a fair value for an annuity, allowing for the impact of health information on life expectancy, is not straightforward, and a key feature of this market will be the support and advice given to members. The solution? The Financial Conduct Authority is due to develop an online pricing tool to help members decide on a potential sale decision if this successfully incorporates the likely impact of health information, this will represent a significant step forward in the public understanding of the risks that an annuity covers. At Aon Hewitt, we intend to closely monitor market developments, as this will inevitably have wider implications for the existing annuity market. It is unclear exactly what support trustees, sponsors, and providers will need, but a solution is likely to require specialist help. Dominic Grimley +44 (0) dominic.grimley@aonhewitt.com 18 19

11 Liability settlement Marginal gains accelerate the journey to buy-out Pensions stability is the ultimate objective for the vast majority of pension schemes. Securing the benefits for all members is a desirable goal, but not achievable in the near term. Typically, this journey can take 20 years or longer, but taking proactive steps can create marginal gains towards your ultimate goal, and these steps can halve the time to buy-out. In particular: Introducing member options to allow access to pension freedoms introduced in the 2014 Budget Giving pensioner members access to the option of higher non-increasing pensions Exploring new innovations in the bulk annuity market; and Monitoring the buy-out market to capitalise on opportunities Making a full scheme buy-out look a relatively attractive option The chart below shows an average 100m pension scheme, with a 38m solvency deficit a typical position in the UK. Even at the end of the current Recovery Plan, there is an 18m deficit which might take another 10 years or more to remove, while they continue to run investment risks. Let s take a look at the steps along this journey: Stage 1: Pensioner risk reduction (i) Pension increase options The cost of securing inflation linked pension increases can be very expensive. Not only are you paying an inflation risk premium, but also paying a premium for the caps and collars on inflation. For some schemes, this cost can create liabilities 5% greater than the pension increase funding assumption for schemes with complex pension increases this cost can be materially more. Offering members access to a higher non-increasing pension gives them greater flexibility and can materially reduce the buy-out cost. Typical Pension Increase Exchange (PIE) terms now exceed a 30% uplift, as demonstrated by the largest ever PIE exercise, on which Aon Hewitt is currently advising. This can reduce the buy-out cost by 10%. (ii) Medical underwriting: Offering members access to a higher non-increasing pension gives them greater flexibility and can slash the buy-out cost Obtaining health and lifestyle information from your members can reduce a bulk annuity cost by 5% or more. For a 40m pensioner population, this could save up to 2m on the buy-out cost. Click here for more detail 10 m Buy-out deficit Commited contributions Expected asset performance Expected buy-out deficit at end of Recovery Plan Pension increase options Medical underwriting Transfer options Early retirement exercise Fix member factors Monitoring and negotiation Remove small pots Potential buy-out deficit at end of Recovery Plan By taking steps along the journey to create marginal gains, the buy-out deficit by the end of the Recovery Plan could be as low as 5.5m. For many sponsors, this might be close to a cheque-writing distance that provides full member security and releases the sponsor of his obligations. Compared to the cost of running the scheme, a full scheme buy-out now looks a relatively attractive option

12 Stage 2: The path to ultimate buy-out Transfer value options Early retirement exercise Fix member factors The cost of paying a fair value transfer value to a member is, for many schemes, around 20% cheaper than paying the cost of securing a bulk annuity. For some members, the option to draw down their benefits as they choose outside of the rigid pension scheme framework is attractive. Given this, it is not any surprise that schemes are helping members access the greater flexibility, giving members more choice. Take-up rates average around 20%, cutting a further 3m from the buy-out cost for our 100m scheme. The cost of securing pensioner members is lower than the cost of securing deferred members, and this gap has grown further as a result of Solvency II. It is no surprise that the bulk annuity market is dominated by pensioner transactions: the term of payment is shorter and there is less uncertainty over when and how members will take their benefits. Reminding members of their option to early retire often results in a non-trivial number of retirements, helping to provide more certainty and take another step on the journey. When you enter a bulk annuity contract, the insurer will typically adopt their own factors for options such as commutation. These factors can be materially greater than those which the scheme currently uses. Negotiating to retain the current scheme factors ( fixed relative to insurer pricing) ensures all members past and present are treated fairly, with no step changes in benefits, and can save another 1% of the liability value along the way. Until recently, the long-term path to buy-out was readily accepted by many pension schemes. But it is becoming clear that buy-out deficits are unlikely to fund themselves and actions, such as those mentioned, are necessary to keep flightplans moving in the right direction. The schemes that are able to build a coherent strategy to reach a state of pensions stability and prioritise their steps along the way will be those that most quickly and affordably reap the rewards of member security, an unshackled sponsor and a content trustee proved to be another record breaking year Possibly the most important decision you will make on the journey is when to approach the market. In the past year alone, traditional Monitoring and preparation Remove small pots insurance pricing has varied by over 5% relative to government bonds as a result of asset opportunities, changes in credit spreads and competitive tension. Schemes that are ready to approach the market, utilising regular pricing feeds such as those used within Aon s Risk Analyzer, with sponsor support, clean data, benefit certainty and trigger points can capitalise on these opportunities. Last but not least, when you enter wind-up, members with small benefits can commute all of their pension for a cash lump sum. Unlike regular trivial commutation, there are no age restrictions over when members can take this option, making it a further attractive opportunity for some members. This option is particularly effective at removing some of the administration cost for small benefits, which can be disproportionate to the size of the benefit. John Baines +44 (0) John.baines@aonhewitt.com 22 23

13 Longevity swap market in 2015 Reinsurer appetite ready to facilitate market growth 2015 proved to be another record breaking year in terms of the amount of liabilities transferred from both pension schemes and UK insurance companies to the reinsurance market, with Aon Hewitt leading advice on more risk transfer than any other adviser. Six pension scheme transactions closed in 2015; all of these transactions demonstrated the increasing appetite from clients to access the reinsurance capacity in a variety of ways to find their optimal balance between intermediation costs and exposure to reinsurer credit risk: the Merchant Navy Officers Pension Fund s deal in January transferred longevity risk via a Guernsey-based entity set up for the fund; the AXA UK Group Pension Scheme deal in July and the follow-on RAC (2003) Pension Scheme deal in November, used a sponsor-owned insurance company (similar to the Aviva and Phoenix deals last year); the Scottish Power Pension Scheme and Scottish and Newcastle Pension Plan (Heineken) deals used the more traditional intermediation model. December 2015 saw the smallest named lives longevity risk transfer to date, with 90m of liabilities transferred to Pacific Life Re via Zurich, again using the more traditional intermediation model and highlighting the accessibility of longevity hedging to schemes of all sizes. In 2015, there was also a significant amount of activity from UK insurance companies passing longevity risk from existing annuity business to reinsurers, with insurers adjusting their business models to increase capital efficiency ahead of the introduction of Solvency II at the start of this year. In terms of public disclosure, PIC, Rothesay Life and Legal and General announced over 6bn of risk transfer between them deal list February 2015 Scottish Power Pension Scheme Provider: Abbey Life (Deutsche Bank) 2bn September 2015 Newcastle Pension Plan (Heineken) Provider: Aviva (through Friends Life) 2.4bn December 2015 Not disclosed Provider: Zurich 90m January 2015 Merchant Navy Officers Pension Fund Provider: Pacific Life Re 1.5bn July 2015 AXA UK Group Pension Scheme Provider: Reinsurance Group of America 2.8bn November 2015 RAC (2003) Pension Scheme Provider: Aviva 0.9bn Market capacity The intermediary market continues to be focused on a few key players, but with new entrants likely over the course of By contrast, reinsurance capacity remains considerable with over 15 market participants, all of which have increasing appetite to do business. We are continuing to see interest from more than 10 reinsurers on most deals, each with 0.5bn or more of capacity and in some cases several billions to put to work. The significant capacity in this competitive market allows deals to be done on attractive terms even for the multi-billion mega-deals. Manpower constraints remain apparent across the reinsurance market, although we have observed that a number of reinsurers are noticeably boosting their teams in anticipation of another bumper year. Outlook for 2016 We are expecting continued appetite from sub- 500m schemes to hedge longevity risk, following completion of the smallest transaction to date covering 90m of liabilities. It is expected that, as with the larger end of the market, the smaller end of the market will remain focused on bespoke solutions where the hedge is structured on a full indemnity basis, rather seeking to hedge against general longevity trends by reference to an index or as part of a pooled fund, thereby avoiding the additional risks associated with an imperfect hedge. At the larger end of the market, the financial appetite of the global reinsurance market is expected to remain strong in 2016, fuelled by continued appetite from both pension schemes and UK insurance companies seeking to hedge longevity risk. In addition, increased structural innovation is expected as clients seek the most cost-effective ways of accessing the reinsurance capacity. Aon Hewitt has a vast amount of experience to draw on in helping clients to find the right solution to hedge their longevity risk. A number of reinsurers are noticeably boosting their teams in anticipation of another bumper year. Michael Walker +44(0) michael.walker.3@aonhewitt.com 24 25

14 Myth buster: a longevity swap is not a barrier to annuity purchase We are frequently asked by trustees and sponsors whether longevity swaps prove to be a barrier to an annuity purchase further down the line. The truth is that longevity hedging could in fact lead to a better outcome for a scheme considering annuity purchase in the medium to long term. Why is that? Longevity hedging could lead to a better outcome for a scheme considering annuity purchase Another common misconception is that the complicated longevity swap structures are too rigid, meaning they are unable to yield beneficial results from unexpected changes in legislation. In fact, longevity contracts are becoming increasingly flexible, particularly following the pension freedom changes effective from April We are seeing increasingly innovative solutions from reinsurers in the market, enabling schemes to benefit from the longevity protection with the certainty over their ability to unwind part, or all, of the hedge in the event of an unexpected future change in legislation. The risk of longevity is often overlooked when following self-sufficient strategies At Aon Hewitt, our view is that a longevity swap is a valuable Better pricing Better matching Better security tool to help mitigate a scheme s second biggest risk. The risk of longevity is often overlooked when following self-sufficient strategies and without a sufficient hedge in place, can cause avoidable strains in the future. Developments in longevity swap structures have come on leaps and bounds over the last few years and there are no longer the perceived barriers that have been seen in the past. Hannah Cook +44 (0) hannah.x.cook@aonhewitt.com In the new Solvency II world, annuity providers are increasingly focused on transferring longevity risk to the reinsurance market and many seek to obtain longevity reinsurance before finalising their pricing. Accordingly, having a longevity swap already in place is a step in the right direction towards an annuity and swap contracts typically envisage a novation to a later annuity transaction. Longevity expectations form a significant part of bulk annuity pricing. By entering into a longevity swap now, the pension scheme can benefit from the longevity protection and reduced volatility relating to pensioner demographic risk prior to a buy-in or buy-out in the knowledge that it can be converted to a buy-in or buy-out at some future point in time. Longevity swaps are typically collateralised and, increasingly, some larger buy-ins are now also carried out on a collateralised basis. Schemes considering a collateralised buy-in can therefore benefit from the use of the collateral structures established as part of the longevity hedge

15 Mid-market longevity hedging The establishment of a new market Longevity swap structures What is the future? Having considered the changes in the market focused on the larger schemes, 2015 also saw noteworthy developments for much smaller pension schemes. Until late 2015, the bespoke or named lives longevity hedging market was only accessible to larger schemes; the Bentley Motors/Abbey Life 400 million deal was the smallest such deal to date. In December 2015 we saw the announcement of a much smaller transaction by an unnamed pension scheme covering 90m of pensioner liability on a much-simplified structure. The transaction was structured under the Traditional Intermediation model with Pacific Life Re taking all of the longevity risk via a Zurich intermediation platform. What are the simplifications? Outlook for the longevity market? Our review of the 2015 longevity swap market showed that it was a year of deals which reinforced the range of structural options available, particularly for multi-billion pound deals. The longevity swap market relies on capacity provided by global reinsurers one of the key questions an organisation entering into a longevity swap has to ask is: how can I most efficiently access that capacity?. In an ideal world a pension scheme and reinsurer would be able to enter into a direct arrangement however the reinsurance business model (and therefore licences) are set up to provide reinsurance rather than direct insurance. Some form of insurance intermediation is therefore required and there are a number of structures available. The most suitable structure for a particular scheme depends on a number of factors The main simplification is that a mid-market longevity swap is unlikely to be collateralised. This means that neither the scheme nor the provider have to make available assets to cover the in-the-money or out-of-the-money position of the swap. Collateralising swaps in this way provides protection against counter-party default risk, but comes with additional complexity and management costs. The downside of removing the collateral provisions is therefore an increase in the credit risk faced by the pension scheme if the scheme s experience is that the longevity protection moves into the money and the net value to the scheme is positive (and equally so for the longevity swap provider if experience is the opposite). But the benefit is that the removal of the collateral provisions lessens the administrative and management requirements on both the provider and the pension scheme and reduces costs accordingly. This is both at the outset with the initial structuring and set-up of the swap, and also in relation to its ongoing maintenance. So costs can be managed to be more proportionate to the risk transferred. Schemes of all sizes face similar challenges: funding shortfalls, exposure to volatile markets and economic conditions, sponsor covenant risks, and uncertain life expectancy (and related demographic risks). Large schemes have concluded that longevity risk is something they want to address as part of their de-risking journey even where material investment risks are still being run, because the scheme expects these to be rewarded. The new market structures allow these schemes to access the capacity in the most efficient way, allowing for the scheme s risk appetite and governance capabilities. Smaller schemes have similar objectives and constraints, albeit on a reduced scale. Where the use of bulk annuities is not feasible in the short to medium term due to the impact on the wider investment strategy (loss of growth assets and potential returns, and/or reduced interest rate and inflation hedge ratios), a longevity swap will be an attractive option for schemes of all sizes. Which structure should I use for my scheme? As is so often the case, the answer to this is that it depends. Which of these options is most suitable for a particular scheme depends on a number of factors, such as: Cost Execution complexity Credit risk appetite The larger a deal, the more proportionate are the fixed costs associated with certain structures The level of risk you are willing to accept from your counterparty, be it the insurer or reinsurer, being unable to pay the required claims when they are due Ease of understanding exactly what it is that you are purchasing and determining if this meets your needs Where the use of bulk annuities is not feasible in the short to medium term, a longevity swap will be an attractive option Hannah Cook +44 (0) hannah.x.cook@aonhewitt.com Ongoing resourcing requirement Legal and regulatory risk appetite The risk that the longevity swap contract is legally sound and that it can suitably withstand future changes in legislation The existing resources and expertise available to the scheme, to deal with the ongoing maintenance of the contract 28 29

16 Below we consider these factors for the three main categories of longevity swap intermediation Traditional intermediation Self-intermediation Pension scheme Intermediary Reinsurers Pension scheme Intermediation Reinsurers Cost Credit Execute Legal Ongoing Cost Credit Execute Legal Ongoing The pension scheme s sole counterparty is an intermediary insurer or bank, which has responsibility for structuring, operating and reinsuring the hedge. The scheme credit risk exposure is only to the intermediary, not to any of the reinsurers taking the longevity risk in the background. This is typically the most costly approach when considering the intermediation costs alone however for many medium sized schemes the reduced implementation costs and risks outweigh the additional cost, making this the most efficient structure. The pension scheme either sets up its own captive or insurance cell or (usually in the case of insurer-sponsored pension schemes) uses a vehicle within the sponsor group to access the reinsurance market. In the case of a captive insurer, this would typically be domiciled offshore the scheme will therefore be taking additional legal and regulatory risks in setting up and managing that vehicle. Pass through The self-owned vehicle is responsible for all of the ongoing operational aspects of the swap as well as arranging all of the reinsurance capacity. There are potential cost savings relative to the other two structures but generally only for the largest and most sophisticated schemes. Pension scheme Cost Credit Intermediary Execute The pension scheme transacts with an intermediary insurance entity (which again has responsibility for structuring, operating and reinsuring the hedge), but the scheme has exposure to reinsurer credit risk, up to 100% of this. The benefit of this is reduced intermediary fees. The insurance entity with which the pension scheme transacts might feasibly be a UK-regulated insurer, or an offshore insurance vehicle, which is rented by the scheme for a fee. Legal Reinsurers Ongoing For larger pension schemes, the savings on the intermediation fees may outweigh the additional execution costs. Often this decision also comes down to the preference to face the credit risk of reinsurers or the intermediary. Market expectation Due to the additional ongoing costs and legal risks associated with self-intermediation, we expect the majority of schemes to favour one of the first two solutions. As the market develops we would also expect these structures to adapt in order to make longevity cover more accessible to smaller schemes with less resources and funds at their disposal. For the traditional intermediation we would expect the complexity, ongoing burdens and associated expenses to reduce for smaller deals possibly removing the need to post collateral altogether. Aon Hewitt has experience of advising on all three types of transaction and we are proud to give our advice on an implementation neutral approach in other words, we do not offer any of these structures as a provider, we are focused purely on giving the best advice to our clients. We would expect the complexity, ongoing burdens and associated expenses to reduce for smaller deals Tom Scott +44 (0) thomas.scott@aonhewitt.com 30 31

17 Longevity risk Prediction is difficult, especially about the future In February 2016, the media finally twigged that the regularly-trotted out rosy view that UK life expectancy is increasing faster than ever might actually be the wrong story. Among the coverage, there was even an article referring to the Biggest annual rise in deaths for almost 50 years on the front page of the Daily Telegraph. This was, however, old news within the actuarial profession, which had already been placed on alert by the heavier than expected mortality in 2013 and 2014, and which, from early 2015, had been monitoring (and frankly fascinated by) the off-the-scale heavy emerging national mortality data. Cumulative reported deaths in England & Wales by week compared with the average over 2005 to 2014 References to off-the scale are usually hyperbole, but you can judge this for yourself from the chart below, which plots cumulative deaths in England & Wales by week number compared with the average for the years 2005 to (Where a line is above zero, it means that mortality for that calendar year has been higher than average up to that point in the year.) How best to predict future mortality improvement is a contentious subject. The past performance of demographers and actuaries has been poor, principally because it was hamstrung by the deep-seated conviction that there must be a ceiling to life expectancy (possibly because we find it hard to conceive that future generations can live to be much older than our parents or grandparents generations). The view that there is a ceiling is now widely regarded as at best unhelpful and at worst plain wrong. This is what the longevity researchers Oeppen & Vaupel have this to say on the subject: [Experts] have repeatedly asserted that life expectancy is approaching a ceiling: these experts have repeatedly been proven wrong. Higher than expected mortality in 2013 to 2015 is renewing interest in the more detailed, cause-based modelling approaches Cumulative deaths +40, , , ,000 Nil -10,000-20, Week number Calculations by Aon Hewitt using data from Data from the Office for National Statistics to 2014 This poor past history of prediction has also tended to discredit approaches to prediction that try to drill down to the detailed drivers and causes of mortality, and so the focus has tended to be on models that extrapolate observed high level patterns of mortality improvement. However, the higher than expected mortality in 2013 to 2015 is renewing interest in the more detailed, cause-based modelling approaches. For instance, at a very high level, growth in national wealth is often associated with higher longevity improvements. The table below picks out two pairs of countries that highlight this. It shows that Ireland s economic growth over the period corresponds with its life expectancy catching up that of the UK, and Russia s stagnant GDP growth corresponds to an equally stagnant change in life expectancy compared with Poland, another ex-eastern Bloc country. There are two key features of the 2015 line in the chart: (a) For the first 10 weeks, deaths rise very steeply. This is widely attributed to the lack of effectiveness of the flu vaccine in early (The World Health Organisation makes an educated guess each year as to the likely prevalent strains for the forthcoming winter but the flu virus can mutate leaving the vaccine ineffective.) (b) Mortality continued to be higher than usual throughout the year, as evidenced by the 2015 line continuing to increase. It is the second aspect that, on top of the already higher than expected mortality in 2013 and 2014, is focussing minds. The question that naturally arises is: was this foreseeable? Change in life expectancy and average GDP growth from 1990 to 2010 Change in life expectancy at 65 UK 3.3 years 2.1% Ireland 4.0 years 5.1% Russia 0.1 years 0.4% Poland 2.6 years 3.8% Average annual increase in GDP Calculations by Aon Hewitt using data from the Human Mortality Database and the World Bank

18 Settlement overseas At Aon Hewitt, we remain cautious about going further and modelling down to micro detail. Although it sounds (obviously) preferable to have a forward-looking model instead of a backwardlooking one, and although it is tempting to incorporate all available data, the danger is that the resulting models are over-fitted to past data and sometimes highly subjective. This is simply because there is not actually enough data to calibrate all the features of a complex model. This in turn means that they are can be less predictive in practice, despite their having a superficially more attractive story. In fact, the relation between GDP per capita and life expectancy referred to above is a well-known and controversial case in point (going by the name of the Preston curve ). Although there is a relationship between income and life expectancy, for rich countries it is only a weak one and some research even suggests that causality may operate the opposite way around from expected, ie, it is health that drives income. Canada Canada saw a threefold increase in the amount of liability settled in 2015 compared with 2014, with close to $7.5bn of assets being transferred to insurers. In 2015 the first Canadian longevity swap was completed with Bell Canada transferring $5bn of longevity risk to Sun Life and the reinsurance market. We also saw Sun Life completing the largest bulk annuity transaction in Canada to date valued at approximately $530m. The latter deal was noteworthy as it involved two independent pension plans combining their annuity purchases in order to access significantly better pricing for their inflationlinked liabilities. Aon in Canada launched its market leading postcode-driven Aon Longevity Model during 2014 and has now announced the Longevity Datapool Service which allows its members access to in-depth mortality analysis, not only to help with understanding the true value of their obligations but also the opportunities and implications of potential settlement activity. There is, of course, still a place for judgement in setting future mortality improvement assumptions, but it needs to be melded with sound statistical approaches and tempered with an understanding of its flaws. Want to understand your longevity risk better? See our longevity risk brochure here Tim Gordon +44 (0) tim.gordon.2@aonhewitt.com Tim Gordon is the current Chairman of the CMI and was a member of the NAPF longevity project steering group acting on behalf of the Institute and Faculty of Actuaries (IFoA). The above comments are written in Tim s capacity as an Aon Hewitt employee and do not necessarily represent the views of and should not be attributed to either the CMI or the IFoA. United States In the United States, two major buy-outs took place by JCPenney and Philips. The latter is particularly interesting for two reasons first that it marked the entrance of Legal & General (through its US subsidiary, Banner Life) to the US market and secondly, in a clear sign that multinationals are considering risk settlement as a global strategic aim, that it tied in with the buyout of the UK scheme by PIC. US buy-outs have typically been run alongside lump sum windows in which the sponsor offers one-off lump sum payments to deferred and retired members in exchange for their pensions. These windows have typically been well subscribed and have enabled sponsors to settle overall liabilities at less than the USGAAP or IFRS value of the liabilities. However, the IRS is now moving to make these exercises less attractive to sponsors. It has already stopped sponsors offering lump sums to members already drawing their pensions and in 2017 will update the mortality tables used to calculate the minimum permissible pension to lump sum conversion rate. We are therefore expecting one last big push during 2016 of sponsors offering deferred lump sums to help manage their liabilities

19 Meet the team Europe In Europe we continue to see the difference between life expectancies assumed by insurers and reinsurers and those assumed by pension plans to be an issue preventing the market from really taking off. Having said that, longevity risk transfer between insurers and reinsurers is becoming much more common, with a number of deals having now been announced in the Netherlands just as these types of transaction paved the way for pension plan deals during the UK market s infancy, we expect the infrastructure now put in place in the Netherlands to make the risk settlement market more accessible in the Netherlands for any plans wishing to transfer risk. In Switzerland, revised mortality projections are starting to bring that gap closer, forcing a number of organisations to take a greater interest than ever in the risk transfer market. Again, the European market is very much watch this space but many of the ingredients are already present and a closer alignment of insurer and pension plan longevity views could cause a quick uptake in the market. (Left to Right) Hannah Cook, Miles Blackford, Matt Fletcher, Ruth Mooney, Tim Gordon, Michael Walker, Tom Scott, Phil Curtis, Alastair McIntosh, Martin Bird, David Allison, Andrew Cooper, Dean Cairnduff, Richard Gooch, Karen Gainsford, Ryan Cox, Kelly Hurren Michael Walker +44(0) michael.walker.3@aonhewitt.com (Left to Right) Tim Wanstall, Carly Bryan, Paul Belok, Dominic Grimley, Joe Hathaway, Janet Pheasant, Ben Harris, Rhian Littlewood, John Baines, Kishore Ananda, Dave Hill 36 37

20 Contacts John Baines +44 (0) Paul Belok +44 (0) Martin Bird +44 (0) Hannah Cook +44 (0) Tim Gordon +44 (0) Dominic Grimley +44 (0) Tom Scott +44 (0) Michael Walker +44 (0) For more information visit aonhewitt.co.uk/risksettlement About Aon Hewitt Aon Hewitt empowers organisations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organisational and personal performance and growth, navigate risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness. Aon Hewitt is a global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide. For more information on Aon Hewitt, please visit: aonhewitt.com Follow Aon on Twitter: twitter.com/aon_plc Sign up for News Alerts: