Following a record breaking year, 2015 gets off to a steady start.

Transcription

1 LCP PENSIONS DE-RISKING QUARTERLY UPDATE Q Following a record breaking year, 2015 gets off to a steady start. IN THIS ISSUE Welcome to LCP s review of the latest developments in the buy-in, buy-out and longevity swap market. In this edition we look at: New business volumes written in the first quarter 2015, demonstrating a steady start to the year A snapshot of current pension buy-in pricing to help inform decisions on when to approach the market LCP jargon buster: what is top-slicing and should it be part of my scheme s de-risking strategy? Volume of buy-ins and buy-outs from 2007 to Q2-Q4 p market update p buy-in price monitoring p4 LCP jargon buster: top-slicing Award-winning advice LCP is the only actuarial/investment firm to have won a buy-in, buy-out or de-risking award in the last five years. LCP has established itself as an authority in risk reduction strategies UK Pensions Awards 2015 judges comments Way ahead of the field in terms of the number of transactions, and for supporting smaller schemes through the de-risking process. FT PIPA 2015 judges comments billion Risk Reduction Adviser Professional Pensions UK Pensions Awards 2015 Derisking Consultant FT Pension and Investment Provider Awards 2015

2 LCP Pensions de-risking quarterly update Q Pension buy-ins and buy-outs get off to a steady start in Volumes for buy-ins and buy-outs over 2015 were 0.8 billion, in line with typical volumes was unusually high, at 4.4 billion, reflecting the UK s largest buy-in to date by the ICI Pension Fund ( 3.6bn). Legal & General was the market leader over 2015 with their unnamed 500m buy-in being the most significant transaction of the quarter. Longevity swaps continued to be a part of the de-risking toolkit for larger schemes, with two longevity swaps hedging 3.5bn of longevity risk also being completed in 2015 for the Scottish Power Pension Scheme and the Merchant Navy Officers Pension Fund (MNOPF). Since the end of buy-in and buy-out activity has picked up, including three transactions over 500m completing in April and May This included the 680m buy-in by the Northern Bank Pension Scheme with Prudential, the largest so far in Looking forward to the remainder of the year, the entrance of Scottish Widows (part of Lloyds Banking Group) to the bulk annuity market in 2015 Q3 will provide welcome additional insurer capacity. In combination with Partnership and Just Retirement, who are now writing more significant volumes of business at the smaller end of the market, this ensures continued competition across pension schemes of all sizes. LCP has had a strong start to 2015, being lead adviser on three out of four transactions over 500m to date in 2015, plus a range of smaller transactions. This follows our success in 2014 where LCP was lead adviser to 12 of 21 buy-ins and buy-outs over 100m. Further details on 2014 can be found in LCP s report Buy-ins, buy-outs and longevity swaps 2014 available at Buy-in / buy-out premium written in 2015 ( m) Total 2014 Aviva Just Retirement Legal & General 664 3,051 5,980 Partnership PIC ,567 Prudential ,706 Rothesay Life ,371 Total 804 4,369 13,185 Numbers may not total due to rounding Pension liabilities covered by longevity swaps in 2015 ( m) Pension scheme Intermediary insurer 2015 Scottish Power Abbey Life (Deutsche Bank) 2,000 MNOPF MNOPF IC Ltd (captive insurer) 1,500 Total 3,500 LCP De-risking masterclass SAVE THE DATE: 20 OCTOBER 2015 At this masterclass we will consider the outlook for pricing in the market for buy-ins, buy-outs and longevity swaps by looking at the key supply and demand dynamics and what the market participants are focused on. We will examine: how pension schemes assess whether to insure their obligations; if so, what instrument to use; and how insurance can be incorporated within their investment and funding strategies. For more details and to register please visit:

3 LCP Pensions de-risking quarterly update Q Pricing impact varies by insurer as final details on Solvency II start to emerge. Following a steady first quarter in terms of transactions completed, volumes have increased in the second quarter and insurers are reporting strong pipelines going into the second half of the year. Recent and current influences on pricing include: Solvency II: The Prudential Regulation Authority ( PRA ) provided individual regulatory responses to insurers at the end of March setting out how they will apply Solvency II from next year. This has had a varied impact on buy-in and buy-out pricing depending on each insurer s business model. The PRA feedback included a few surprises for some insurers, resulting in reduced appetite in the short term, but competitive pricing remains available from others. The General Election: The outcome of the election on 7 May was generally viewed positively by the financial markets, with a clear result promising a more stable long-term economic outlook. Despite this, bond and swap markets have continued to be volatile, although insurer pricing has now returned to similar levels to just before the election. Looking further ahead, headwinds may emerge in the run up to the referendum on continued EU membership, due by the end of This volatility in pricing emphasises the importance of carefully considering both the timing of any transaction and how best to engage with insurers to get the best results. LCP Visualise s online insurer price tracker shows that the relative pricing of buy-in and buy-out transactions (compared to the cost of backing liabilities with gilts) fell back slightly over the quarter, though the bottom of the pricing range remains close to a gilts-flat return. LCP Visualise helps pension plan trustees and sponsors identify when to approach the market, based on a range of indicative insurer pricing. To access visit: lcpvisualise.com

4 LCP Pensions de-risking quarterly update Q What is top-slicing and should it be part of my scheme s de-risking strategy? LCP Jargon Buster Since the medical underwriting specialist insurers (Just Retirement and Partnership) joined the market, we have seen an increasing number of top-slicing buy-in transactions, including Taylor Wimpey s recent 206m buy-in. But what does top-slicing mean? Top-slicing is where a pension scheme insures its largest liability members (eg executive members). The main advantage of this approach is that it removes a significant concentration of risk inherent in these individuals. This approach can also be efficient in terms of the amount of longevity risk hedged per of buy-in, making it particularly attractive for schemes with more limited capacity for buy-ins under their current funding and investment strategy. Top-slicing can also be used as part of a wider de-risking strategy. For example, by using top-slicing to reduce longevity concentration risk, a scheme can make its remaining liabilities more attractive for a future buy-in a helpful future differentiator as the buy-in market gets increasingly busy with insurers being more selective. If used appropriately, medical underwriting can add significant value to top-slicing principally, through a lower buy-in price. How is the top-slice assessed? Traditionally, insurers have assessed longevity using various rating factors such as age, sex, pension size, postcode and occupation and added margins to their pricing for uncertainty. These margins are typically greater for members with large pensions, who are assumed to be in the best health. This can make conventional buy-in pricing for these members look expensive. In contrast, under a now well-established process, specialist insurers can assess the members medical data in order to take a more accurate view on their life expectancy and reduce the level of caution in their pricing. This can help insurers to reduce their price for the buy-in, particularly for a top-slice where these individuals would otherwise be priced cautiously. For a top-slice buy-in, this mitigates one of the key concerns with medical underwriting - that it can lead to an increased price if members are found to be healthier than average. Who should consider top-slicing? Schemes who have material liability concentrated into a relatively small proportion of the membership may find top-slicing a valuable option to investigate further. How LCP can help LCP works with schemes of all sizes to help them assess de-risking options including whether topslicing and medical underwriting might be an attractive approach in their circumstances. Feasibility exercise To help compare insurance options such as conventional or medically underwritten buy-ins to other de-risking options, focussing on the most suitable approaches for your scheme given its membership profile, benefit structure and investment strategy. Trustee training Can be tailored depending on the experience of your trustee board and the size of the pension scheme. It is offered free of charge and can be run at a time which suits you. To find out more about a feasibility exercise and/or trustee training please call us on +44 (0)

5 One adviser led over 50% of large buy-ins and buy-outs that completed in 2014* Want to know why? Contact us to discuss the work we have been doing and how we can help you identify opportunities for your pension scheme. Clive Wellsteed Partner & Head of Practice +44 (0) *LCP was lead adviser on 12 of the 21 buy-ins and buy-outs over 100m in 2014 Stay Informed View a full list of our de-risking services at Get the latest updates from LCP via Twitter. Use hashtag #lcpbuyout and join the conversation. Charlie Finch Partner An event from the Financial Times Buy-in/buyout Consultant Lane Clark and Peacock WINNER Myles Pink Partner myles.pink@lcp.uk.com The LCP Update is based on our current understanding of the subject matter and relevant legislation which may change in the future. Such changes cannot be foreseen. This document is prepared as a general guide only and should not be taken as an authoritative statement of the subject matter. No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this Update can be accepted by LCP. LCP is a firm of financial, actuarial and business consultants, specialising in the areas of pensions, investment, insurance and business analytics. LLP London, UK Tel: +44 (0) enquiries@lcp.uk.com LLP Belgium CVBA Winchester, UK Brussels, Belgium Tel: +44 (0) Tel: +32 (0) enquiries@lcp.uk.com info@lcpbe.com Ireland Limited Dublin, Ireland Tel: +353 (0) enquiries@lcpireland.com Netherlands B.V. Utrecht, Netherlands Tel: +31 (0) info@lcpnl.com UAE Abu Dhabi, UAE Tel: +971 (0) info@lcpgcc.com All rights to this document are reserved to LLP ( LCP ). This document may be reproduced in whole or in part, provided prominent acknowledgement of the source is given. We accept no liability to anyone to whom this document has been provided (with or without our consent). LLP 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 95 Wigmore Street, London W1U 1DQ, the firm s principal place of business and registered office. The firm is regulated by the Institute and Faculty of Actuaries in respect of a range of investment business activities. 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 licensed by the Institute and Faculty of Actuaries. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide. UAE operates under legal name Belgium Abu Dhabi, Foreign Branch of Belgium. LLP 2015.