Insurance of pension schemes

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Against a backdrop of volatile pension deficits, both trustees and sponsors are continually looking for ways to reduce or remove pension risk. One way to do this is through the purchase of bulk annuity insurance policies.

We work with trustees and sponsors to help them assess whether an insurance solution can work, now or in the future, and to create a plan to transfer their pension liabilities to the insurance market.

Available options

Pricing conditions can vary significantly. New products and increased competition can also affect pricing. This means that, more than ever, trustees and sponsors need to constantly monitor the market and actively review their insurance plans.

There are a wide range of options in the market and innovation is adding to these all the time. These include:

  1. Buy-in (or partial buy-in)
  2. Buy-out
  3. Longevity hedging
  4. Synthetic solutions

 

 

1 Buy-in (or partial buy-in)

The purchase of a bulk annuity contract covering all or some of the pension payments. It could be applied to part of the scheme membership or even part of a pension benefit.

Why should you consider it?

  • Part of a plan to remove liabilities from the balance sheet
  • An effective way to reduce the risk and volatility within the pension scheme
  • An investment decision to use the buy in as an alternative asset class
  • Tactical decision to take advantage of favourable conditions in the market

What schemes does this work for?

  • Schemes that are not fully funded on a buy-out basis but are still looking for opportunities to derisk
  • Scheme assets consist of a large government bond holding
  • Mature schemes with a relatively high pensioner population

Risks removed: all risks in relation to the liability insured except the counterparty default risk

Insurance of pension schemes

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2 Buy-out

The purchase of a bulk annuity contract that covers pension payments. Members are provided with individual annuity contracts.

Why should you consider it?

  • Remove liabilities from the balance sheet and any obligations to provide those pensions in the future
  • Wind up the pension arrangement if all the liabilities are bought out
  • Take advantage of market conditions

What schemes does this work for?

  • Schemes that are fully funded (or nearly fully funded) on a buy-out basis
  • Schemes with sponsors that are looking to restructure in the near future and where the removal of pension liabilities is a key issue

Risks removed: all risks in relation to the liability insured

Insurance of pension schemes

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4 Synthetic solutions

A bespoke arrangement that hedges interest rate, inflation and longevity risk covering part or all of a scheme’s liabilities.

Why should you consider it?

  • Allows the scheme some flexibility to address risks particularly relevant to them
  • A synthetic solution can be less expensive than carrying out a buy-in and can allow the scheme to utilise other assets eg non-UK sovereign assets benefiting from higher expected returns
  • Allows the Trustees / company continued control over the investment strategy

What schemes does this work for?

  • Medium to large sized schemes
  • Schemes that are not fully funded on a buy out basis but are still looking for opportunities to derisk.

Risks removed: Interest rate, Inflation and Longevity risk

Insurance of pension schemes

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3 Longevity hedging

A contract with a provider where fixed cashflows based on estimated mortality are swapped for cashflows based on actual experience, removing or reducing longevity risk.

Why should you consider it?

  • Effective way of removing longevity risk. Longevity risk is significant - in the last 15 years, inclusion of additional allowances for longevity improvements have resulted in liability increases of around 10% for a typical scheme
  • Avoids the need to pay a large upfront premium as is usually the case with traditional buy-in and buy-out contracts

What schemes does this work for?

  • Schemes that have other investment hedging arrangements in place already eg interest or inflation hedges
  • Schemes where there is a desire to maintain investment risk exposure
  • Large schemes where buy in/buy out may not be feasible at the current time

Risks removed: Longevity risk

Insurance of pension schemes

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