Buyouts Thomas Olunloyo, Pricing and Product Development Actuary MetLife Assurance PP Pensions Academy 2012 13 November 2012
Agenda Introduction to buy-ins and buyouts Recent market activity Preparing for a buy-in or buyout Effect of financial markets on pricing Making buy-ins and buyouts work for you
Buy-ins and buyouts: the market The pace of de-risking activity in 2010 and 2011 was high. 2012 has been a slower year Source: LCP Pension Buy-ins, Buy-outs and Longevity Swaps 2012
Buy-ins and buyouts: the market Interest in longevity only transactions has increased for large schemes Source: JLT Pension Capital Strategies Buyout Market Watch March 2012
Buy-ins and buyouts: the basics Buy-in Buyout Liabilities remain on balance sheet but are matched Retain flexibility to manage benefits within the scheme Can be part of phased buy-out strategy May not require additional funding Reporting and monitoring processes need to be established for accounting and administration A strategy for residual liabilities and assets needs to be defined Liabilities are removed from balance sheet Reduced on-going risk, cost and management time and expense Significant management time needed for implementation Likely to require additional funding Future top-ups are difficult (e.g. for discretionary increases) Technical issues with partial solutions such as member equality and discharging GMP liability
Buy-ins and buyouts: preparation Feasibility is it a good idea? Data and benefit review accurate and competitive pricing avoiding aftershocks trustees can be personally liable Agree investment strategy should assets be de-risked in advance? Organisation clear objective, triggers and budget can decisions be made quickly?
Buy-ins and buyouts: trigger based mechanisms Scheme Flight path to buyout Investment de-risking Liability reduction Employer covenant Employer Scheme valuation Analyst valuation M&A activity Union negotiations Legislative Accounting standards IORP Directive GMP equalisation CPI / RPI Financial Market expectations for future inflation Long term interest rate changes Corporate bond yields increase Equity market gains
Buy-ins and buyouts: pre-implementation and implementation
Buy-ins and buyouts: driven by the markets Pricing is significantly influenced by three market components Interest rates Lower price Inflation Higher price Bond yields Lower price
Rate Buy-ins and buyouts: driven by the markets The market rates that affect pricing can be volatile over short periods of time 7.00% Market Conditions Movements 6.00% 5.00% 4.00% 3.00% 2.00% Corporate bond spreads Inflation swap rate LIBOR swap rate 1.00% 0.00%
Buy-ins and buyouts: further solutions Age / amount grouping of liabilities Old age pensioners Only those over SPA Etc. Enhanced annuities Detailed mortality data for use in assumption setting Pre-purchase on an individual basis Deferred buyout Deferral of period Deferral of premium Use of company property / assets Contingent assets Conditional assets Active member protection Buy-in Buyout
Buy-ins and buyouts: small schemes Why? Risk pooling random volatility is a key driver of costs On-going expenses Consultancy models Expedited processes Fixed fee models Insurance solutions Limited providers Proportionate response Out of market risk
Thomas Olunloyo, MetLife Assurance Questions? Thomas Olunloyo tolunloyo@metlife.com (44) 207 557 4940
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