2015 ANNUAL BUYOUT MARKET WATCH REPORT From JLT Employee Benefits for the year ended 31 December 2014 JLT EMPLOYEE BENEFITS
2 2015 ANNUAL BUYOUT MARKET WATCH REPORT FOREWORD Duncan Howorth CEO JLT EMPLOYEE BENEFITS Welcome to JLT Employee Benefits second Annual Buyout Market Watch Report for the year ended 31 December 2014 and what a year it was! Bulk annuity and longevity swap transactions of onceunimaginable proportions, a rapidly growing medically underwritten buy-in market and the highest new business volumes on record, all spurred on by high demand and the reverberations of the Chancellor s 2014 Budget. It s time for pension schemes of all sizes to give some serious thought to the future. This year we ve broadened the range of issues covered in our report to cater for the whole spectrum of de-risking transactions. Our panels of external experts, comprising insurers, reinsurers, independent trustees and pension lawyers, provide valuable insights into a rapidly evolving market place and I d like to extend my personal thanks for all their contributions. There s no doubt that the Government s freedom and choice agenda introduced by recent Budgets has shaken up the pension industry and re-engaged at least part of the population with planning for their retirements. At JLT Employee Benefits (JLT), we re proud to be able to offer a wide range of advice on designing and implementing well-planned de-risking exercises incorporating both increased member options and liability insurance and settlement. Our dedicated Buyout Team worked successfully alongside multiple internal and external advisers last year to complete a total of 18 trades - over 10% of 2014 s bulk annuity transactions. We assess how we can better meet our clients needs and this report introduces two new fixed-fee offerings to help legacy hybrid and defined benefit arrangements to efficiently discharge their liabilities. We wish our clients every success for the coming year. Duncan Howorth CEO JLT Employee Benefits 2014 HIGHLIGHTS Over 2014, we were delighted that the innovative work carried out by the JLT Buyout Team on behalf of our clients was recognised by the industry. We were shortlisted for: De-risking Provider of the Year at the 2014 Pension Awards; and Consultancy of the Year at the European Pensions Awards. The following deals, advised by the team, were also shortlisted alongside three 1bn+ trades in the Best De-risking Strategy category at the 2014 Financial News Awards: 12m medically underwritten buy-in for the British Arab Commercial Bank (BACB): the first such trade following a whole-of-market broking exercise; and 120m and 85m trigger-based pensioner buy-in trades for the JLT Pension Scheme.
CONTENTS Editor s welcome 04 2014 headlines and highlights 05 Market opportunities for smaller trades 06 Efficient solutions for legacy schemes 08 Insurer roundtable smaller trades 10 Medically underwritten bulk annuities then and now 14 Case Study 8.5m medically underwritten pensioner buy-in 16 Medium-sized schemes opportunities galore 18 Making deals affordable illustrative case studies 20 The de-risking landscape a trustee perspective 22 Integrated liability management and bulk annuity deals 25 Flexible payment terms 27 Larger schemes market trends for mega deals 29 Insurer roundtable larger trades 32 A view from the bench structure and security 36 Roundtable reinsurers 39 2014 Market statistics 42 Is a buy-in/buyout affordable? 44 Current issues and regulations affecting the bulk annuity market 46 Smart investment planning 48 Discharging pension liabilities planning your escape route 52 Case study Partial buyout 54 2015 Keeping the momentum and looking to the future 56 JLT Buyout Team 58
4 2015 ANNUAL BUYOUT MARKET WATCH REPORT EDITOR S WELCOME Ruth Ward Senior Consultant JLT BUYOUT TEAM Since publishing our first Annual Buyout Market Watch Report in May 2014, the buy-in, buyout and longevity swap markets have continued to evolve. They have delivered further innovation, record-breaking transactions and have brought fresh de-risking opportunities for private sector pension schemes. In addition, the 2014 and 2015 Budgets have brought about changes that have materially altered the pension landscape in the UK. The repercussions of the Government s freedom and choice agenda are being felt within both the bulk annuity and longevity swap markets, and are simultaneously increasing options for trustees, sponsors and, potentially, scheme members. HOW TO NAVIGATE THIS SHIFTING LANDSCAPE? Our theme for this year s report is making deals work for you. Not all opportunities are equal, but, if you know where to look, there s something for everyone! With this in mind, we ve split our report into sections focussed on: Smaller trades: up to 100m (p6-17); Medium-sized trades: around 100m- 400m (p18-28); and Larger trades: 400m- 1bn+ (p29-41). Members of our dedicated Buyout Team share their experiences of finding opportunities and affordable options for schemes in each of these markets, with illustrative case studies to add further colour. We ve also interviewed two panels of insurers, with a distinct focus on the smaller and larger ends of the bulk annuity market, and invited three major reinsurers to offer their insights on the future for longevity swap transactions. PRACTICAL GUIDANCE There are a myriad of interdependent issues that must be addressed during a successful broking exercise. Your buy-in/buyout adviser will act as conductor, co-ordinating advice from the trustees and/or sponsor s legal, actuarial and investment advisers (amongst others) to ensure you can take well-informed and timely decisions. To bring a little flavour to this, two leading pension lawyers comment on contractual aspects of bulk annuity transactions: structuring and cancellation clauses, whilst a third looks at the trend towards disintermediation in large longevity swap transactions (p36-38). Our Investment Consulting Practice also highlight important considerations in the months, weeks and days leading up to a trade (p48-51). What about the people at the coal face? A roundtable of independent trustees discuss their first-hand experiences and de-risking lessons learned (p22-24). WHERE ARE WE HEADING? Was 2014 an exception or can we expect more fireworks over 2015? As well as analysing last year s results (p42-43), we share our expectations for the one ahead (p56-57). Unsurprisingly, the ultimate goal for most schemes is to buy out and fully discharge scheme liabilities. For most, the wind-up process can appear a daunting and drawn-out exercise. To start you down the right track, our experienced Discontinuance Team share key considerations and motivations for smoothing the journey (p52-53). We hope this year s report gives you plenty to think about. Please continue to share your views and concerns with our Buyout Team (contact details on p58) and let s make 2015 a year to remember!
JLT EMPLOYEE BENEFITS 5 2014 HEADLINES AND HIGHLIGHTS Martyn Phillips Director and Head of Buyouts JLT BUYOUT TEAM 2014 was a record-breaking year in every sense for the bulk annuity and longevity swap markets. Highlights included: BULK ANNUITIES LONGEVITY SWAPS Total business volume over 2014 13.2bn 21.0bn Total number of deals over 2014 c. 160 2 Largest vanilla (nonunderwritten) trade in 2014 Largest medically underwritten trade in 2014 Insurer developments Other significant events/deals 3.6bn buy-in for the ICI Pension Fund (split between L&G 3.0bn and Prudential 0.6bn) the former was largest bulk annuity trade to date 206m buy-in for the Taylor Wimpey Pension Scheme (written by Partnership Assurance) a top-slicing deal (see p14-15) Rothesay Life acquired MetLife s UK bulk annuity business Aviva announced its intention to acquire Friends Life (the takeover became effective on 10 April 2015) 2.5bn partial buyout for TRW Automotive (written by L&G) incorporated a Pension Increase Exchange (PIE) and trivial commutation exercise 16bn longevity swap for the BT Pension Scheme (written by the Prudential Insurance Company of America, PICA) the largest to date The use of wholly-owned insurance vehicles to access the reinsurance market See p42-43 for full market statistics and p29-31 for commentary on the striking features and implications of the mega trades. AND ONTO 2015 Q1 2015 has started relatively quietly (bar the 1.5bn MNOPF longevity swap announced in early January), but Budgetary pressures remain. The Government s freedom and choice agenda has materially reduced new business sales of individual annuities to below 50% of pre-2014 Budget volumes, increasing insurers appetite for bulk annuity business and encouraging new market entrants. We ve already seen one of the latter (Canada Life has made clear its intention to quote for non-underwritten deals) and we anticipate a further two early in Q3 2015. This should only increase competition for small and medium-sized deals. 2014 s record-breaking transactions demonstrated that a buyout focus is not unrealistic for today s mega schemes. The associated shift amongst these from long-term self-sufficiency to buyout targets coupled with the successful employment of alternative ( captive ) longevity swap structures point towards further super-sized deals this year. Watch this space!
58 2015 ANNUAL BUYOUT MARKET WATCH REPORT JLT BUYOUT TEAM The JLT Buyout Team has a long and well-established reputation for guiding clients with defined benefit pension schemes through de-risking transactions, from initial contact with insurers, to negotiating terms and the signing of contracts and placing business with all major buy-in/buyout providers. Team members have a combined experience of over 25 years of advising on bulk annuity deals. Over the last two years we have advised on almost 50 transactions, accounting for around one in eight of all bulk annuity deals over this period. The Team are able to advise on a wide range of transaction types, varying in size from below 1m to in excess of 1bn, covering deal structures from conventional bulk purchase annuities to fully bespoke de-risking solutions. Due to the specialist nature of this activity, the Team s main focus is on helping clients with these types of transactions. This ensures we have up-to-date knowledge of the market from working with insurance providers on a daily basis and reflects JLT s commitment to this area. We also benefit from a number of our senior leadership team having previously held prominent positions within providers from the bulk purchase annuity marketplace. This gives us an important insight, which enables the Team s processes and propositions to be well aligned with insurers own capabilities, processes and requirements. SUCCESS OVER 2014 Over 2014 we completed 18 bulk annuity transactions for our clients, over 10% of total market deals transacted last year. We have built strong relationships with insurers and transacted with six of the eight providers trading regularly in the market last year. Our deal conversion rate, measured at c.60% by one leading insurer for a period up to December 2014, is significantly ahead of the industry average (which regular market speculation and commentary put at around 20%). If you have a question regarding the issues discussed here or any aspect of de-risking your pension scheme, please do not hesitate to speak to one of our dedicated team. Martyn Phillips Director, Head of Buyouts E: martyn_phillips@jltgroup.com M: 07796 998 140 Tiziana Perrella FIA Principal E: tiziana_perrella@jltgroup.com T: 0161 242 5332 Ruth Ward FIA Senior Consultant E: ruth_ward@jltgroup.com T: 0207 558 3036 David Barratt Senior Consultant E: david_barratt@jltgroup.com T: 01727 775 421 Ken Womack Associate Consultant E: ken_womack@jltgroup.com T: 0161 931 4482 Robert Edge Associate Consultant E: robert_edge@jltgroup.com T: 020 7528 4251
IF YOU WOULD LIKE THE FULL REPORT THEN PLEASE CONTACT THE JLT BUYOUT TEAM. JLT Employee Benefits The St Botolph Building 138 Houndsditch London EC3A 7AW Tel +44 (0)20 7528 4000 Fax +44 (0)20 7528 4500 www.jlteb.com JLT Employee Benefits. A trading name of JLT Benefit Solutions Limited. Authorised and regulated by the Financial Conduct Authority. A member of the Jardine Lloyd Thompson Group. Registered Office: The St Botolph Building, 138 Houndsditch, London EC3A 7AW. Registered in England No. 02240496. VAT No. 244 2321 96. May 2015 9338