health wealth career uk db bulk pensions insurance · 2020-06-09 · uk bulk pensions insurance 2...

H E A LT H W E A LT H C A R E E R

U K D B B U L K P E N S I O N S I N S U R A N C EM A R K E T R E V I E W M A R C H 2 0 1 6

U K B U L K P E N S I O N S I N S U R A N C E

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F O R E W O R D : W E L C O M E T O T H E

F I R S T E D I T I O N

A R E V O L U T I O N I N T H E S E T T L E M E N T O F L A R G E

P E N S I O N L I A B I L I T I E S

W H Y A R E I N C R E A S I N G N U M B E R S O F S C H E M E S

C A R R Y I N G O U T A P E N S I O N E R B U Y - I N ?

A £ 1 2 B I L L I O N M A R K E T — M O V I N G F R O M S T R E N G T H

T O S T R E N G T H

T H E A R T O F A S S E S S I N G Y O U R S C H E M E ’ S L O N G E V I T Y

R I S K A N D D E C I D I N G W H E T H E R T O B U Y

P R O T E C T I O N

W I L L I N S U R E R S S TA N D T H E T E S T O F T I M E ?

L I S T O F B U L K A N N U I T Y A N D L O N G E V I T Y S WA P

T R A N S A C T I O N S

M E R C E R P E N S I O N R I S K E X C H A N G E ® - C R E AT I N G A C L E A R L I N E O F S I G H T T O A

P O T E N T I A L “ E N D G A M E ”

A L I G N I N G I N V E S T M E N T S A S PA R T O F A B U L K A N N U I T Y

T R A N S A C T I O N


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0 1 .F O R E W O R D

W E L C O M E T O T H E F I R S T E D I T I O N O F U K D B B U L K P E N S I O N S I N S U R A N C E — M A R K E T R E V I E W .

We’ve sought to keep you up to date on the latest developments in the UK bulk pensions insurance market relevant to defined benefit (DB) pension plans. Keeping in touch in this fast-evolving and growing marketplace is now demonstrably beneficial for all stakeholders. The range of choice and the commercial environment mean it is easy to pay more than necessary and still not purchase the best product for your scheme. Bulk pensions insurance policies tend to be irreversible and decisions made, or not made, could impact significantly on the sponsoring employer’s finances and the long-term outcomes of scheme members.

David EllisMercer UK Leader,Bulk Pensions Insurance Advisory

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Many sponsoring employers and trustees are aiming to move their UK pension obligations to an insurer by purchasing a bulk annuity. For this reason, the UK bulk pensions insurance market is likely to increase in size over time. Over the last 25 years, approximately £80 billion in DB obligations have been transferred to insurers, but this will be dwarfed by transaction volumes expected in the next 20 years as it becomes increasingly attractive to make such transactions:

• The natural passage of time makes DB pension obligations more certain due to reducing durations, making them easier and cheaper to externalise via insurance or lump sum payments to individuals.

• For most sponsoring employers, these same obligations are also becoming legacy in nature as employees move on or retire, making the decision to move away from sponsorship easier.

• The recent and ongoing sea change in pension flexibility promoted by the current UK government is permitting individuals access to their benefits, previously locked into the pension system, in ways never seen before.

Substantial evidence supports this trend, with a steadily increasing volume of deals transacted in recent years despite low yields in financial markets. In many cases, it is now demonstrably achievable to re-engineer the finances of plans of all sizes to support the outcome the sponsoring employer is seeking, with the full support of trustees. The economic, legal, governance, and administration aspects can be coordinated to make a transaction work for all stakeholders.

• Plans of all sizes can be transformed, sometimes in short periods (for example, less than a year).

• Win-win-win scenarios are achievable for the sponsor employer (by removing obligations), the trustee (by settling member benefits), and members (by offering them benefits options).

• The true financial position isn’t set in stone, and can be substantially different (in a beneficial way) from desktop estimates.

Mercer’s Bulk Pensions Insurance Advisory group has led on more than £17.5 billion of UK buy-in and buyout transactions, more than any other advisor, including all five buyouts in the UK involving a premium above £1 billion. The core broking team, numbering 22 individuals with 200 years of combined experience, partners with others at Mercer and its sister companies, Marsh and Oliver Wyman, to offer a genuine one-stop shop for all advisory and transactional services in relation to pension buy-ins, buyouts, and wind-ups.

Asset movements to the end of February 2016 have been harsh for a lot of schemes; nevertheless, the continuing volatility, further fuelled by the Brexit political debate, has the potential to create significant pricing opportunities for those who are out-at-market and able to transact quickly as and when the time is right. Mercer Pension Risk Exchange® — see Article 03 — allows buyers and sellers of bulk annuities to come together to monitor prices and rapidly transact, a way of interacting not seen before, as recognised by the Pensions Age “Innovation Award of the Year” 2016.


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0 2 . A £ 1 2 B I L L I O N M A R K E T — M O V I N G F R O M S T R E N G T H T O S T R E N G T H

Martyn PhillipsBulk Pensions Insurance Advisory

Against the challenging backdrop of volatile markets, persistent scheme deficits, and low inflation/gilt yields, and alongside significant pensions-related distractions (trustees and sponsors embracing “Freedom and Choice” and insurers getting ready to implement their new regulatory capital regime under Solvency II), the bulk annuity market remained extremely buoyant during 2015, with approximately £12 billion of bulk annuities purchased, the second-highest annual amount of pensions risk ever transferred to insurers. This clearly demonstrated that effectively and economically transferring pension risks to insurers is a thriving marketplace that can only be set to grow.

Scottish Widows

Rothesay Life

Prudential

Pension Insurance Corporation

Legal & General

Just Retirement / Partnership

Aviva

AEGON

M A R K E T S H A R E 2 0 0 8 - 2 0 1 4

1 % 9 % 8 %3 %

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The largest deal of 2015 was the £2.4 billion buyout by Philips, insured with Pension Insurance Corporation (PIC) in November. Alongside this trade was more than £1.1 billion of the same scheme converted during the year from buy-in to buyout with Rothesay Life and Prudential. The Philips transaction (like the TRW transaction in 2014 that was placed with Legal & General) emphasises the ability to financially re-engineer pension schemes, creating value via a coordinated and combined package that allows members to take valuable options, supported with high-quality financial advice, against a background of annuitisation. This kind of joined-up project delivers improved value for individual members and can enable economic settlement of pension liabilities at well below what was perceived to be the realistic buyout cost.

Despite the headwind of low-yield and volatile markets, insurer pricing remained attractive over 2015, with notable aggressive pricing seen at the £100 million pensioner-size transaction level, where pricing remains significantly lower than the cost of backing those same liabilities using gilts.

Looking forward, early evidence indicates that Solvency II has left pricing in 2016 for pensions in payment relatively unaltered compared to 2015 prices, but with perhaps a modest increase in deferred member pricing. Insurers are tending to purchase more mortality reinsurance as they adapt to the new regime.

Overall, the outlook for 2016 is that the bulk annuity market remains good to go, with existing insurers continuing to commit to the market, plus some new entrants during 2015 and beyond keen to establish themselves within this growing marketplace: Scottish Widows wrote £400 million of business during 2015; Canada Life traded their first deal, albeit a more modest £5 million.

2015 saw the continuing and growing use of medical underwriting to broaden the range of solutions being adopted to de-risk pension schemes. Of particular note was the growing use of “top slicing” deal structures, whereby risks concentrated within the small number of largest liabilities among the pensions in payment are subject to a medically underwritten buy-in. Often, the largest 10% of pensions in payment can account for 25% or more of total pensioner liabilities. Essentially, medical underwriting seeks to gain a more granular understanding of longevity risk among underwritten liabilities by gathering health and lifestyle information. Improved pricing can thus potentially be achieved by removing margins for prudence for any uncertainty over the potential life expectancy of individuals with such large pensions.

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0 3 .M E R C E R P E N S I O N R I S K E X C H A N G E ® - C R E AT I N G A C L E A R L I N E O F S I G H T T O A P O T E N T I A L “ E N D G A M E ”

Stephen PurvesBulk Pensions Insurance Advisory

Would it be helpful to have robust, monthly information on your DB pension schemes’ true finances — and to understand how these are developing over time?

Improved information becomes more critical when a buy-in or buyout is being considered, as sponsoring employers and trustees need to know they’re doing the right thing at the right time in managing their pension obligations and need to know the commercial insurance pricing for their own pension plans at all times, enabling them to take any opportunities that could arise.

The UK pension buy-in and buyout market hasn’t always lived up to these ideals, and in many ways hasn’t operated as efficiently as it could. Sometimes insurer pricing has been difficult to obtain quickly and cheaply, and obtaining regular insurer pricing has tended to require a bespoke

approach with either just one insurer or a small group of insurers. This approach isn’t easy to maintain for lengthy periods and may inadvertently omit insurers that could have offered the best pricing at that time.

Mercer Pension Risk Exchange® solves these problems and, as a result, has won the Pensions Age “Innovation Award of the Year” 2016. It brings real clarity to the UK pension buy-in and buyout market by supporting a two-way information flow between buyers and sellers of bulk annuities and provides information everyone needs, instilling the confidence needed for decision-makers to act decisively when the time is right.

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“An impressive submission in a highly competitive category, this firm’s entry displayed true innovation with clear benefits for the pensions space.” — Pensions Age, 2016 (Innovation Award of the Year)


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P R I C E S O B T A I N E D V I A M E R C E R P E N S I O N R I S K E X C H A N G E A R E A C T U A L I N S U R E R P R I C E S

The Exchange provides pricing directly from the insurers on a regular basis — not pricing estimated by Mercer derived from broader insurer pricing information. This is real-life insurer pricing, not indicative pricing. It’s like receiving a range of formal bids from insurers each month, often starting years before pension plans are ready to transact.

Insurers’ pricing and terms are based on transaction-quality, detailed, plan-specific disclosures covering not only the plan’s benefits and individual member level data but also the plan’s wider commercial situation — the same information that is used when plans actually transact.

1. Mercer Pension Risk Exchange is a transparent, online platform bringing together buyers and sellers of pension buy-ins and buyouts. This facilitates the discovery of opportunities in a way never seen before.

2. The Exchange allows insurers to see your pension plan’s (anonymised) data directly and permits insurers to make exclusive proposals for buy-in or buyouts that you wouldn’t otherwise obtain; for example, if an insurer is temporarily able to offer improved pricing.

3. The Exchange assists in decision-making and facilitates the selection of optimal timing for a future buy-in or buyout, thereby improving outcomes.

4. All insurers active in the UK bulk annuity market support the Exchange, and it works for all deal sizes and deal types (buy-ins, buyouts, medically underwritten bulk annuities, etc.).

5. By producing plan-specific disclosures up front, it permits faster decision-making and eventual deal execution, allowing trustees and sponsors to take advantage of often fleeting windows of opportunity.

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H I G H P R I C E

L O W P R I C E

M E R C E R P E N S I O N R I S K E X C H A N G E ®

Sponsoring employer agrees to fund buyout

“for the right price”

Create plan-specific

disclosures for insurers and

request quotations

Insurers’ initial pricing obtained: price not right,

so no deal

Member benefit/data

cleanse

Negotiated price obtained: deal identified

Deal executed

Commence

monitoring

phase via

monthly pricing

An insurer

suggests ways to

improve data to

improve pricing

Create

plan-specific

disclosures for

insurers and

upload to

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Sponsoring

employer agrees

to fund buyout at

a target price

Pricing hits

trigger to

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“I think that this is a brilliant initiative. I would encourage sponsoring employers and trustees with a buy-in or buyout in their short- to medium-term plans to give this a very close listen.” — Steve Southern (Director), Steve Southern Trustees Limited.


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0 4 .A R E V O L U T I O N I N T H E S E T T L E M E N T O F L A R G E P E N S I O N L I A B I L I T I E SA C H I E V I N G A C C O U N T I N G S E T T L E M E N T O F B I L L I O N S O F P O U N D S O F P E N S I O N L I A B I L I T Y , R A P I D LY A N D A F F O R D A B LY

Harry HarperBulk Pensions Insurance Advisory

Over the last two years, a breakthrough has occurred in the pace and method by which large pension liabilities can be economically settled. The Philips transaction (£2.4 billion of pension liability that was bought out during 2015, plus a further £1.1 billion that was converted from buy-in to buyout during 2015) represents a landmark de-risking and buyout transaction that follows closely on the heels of the TRW transaction (£2.5 billion in 2014). Both of these Mercer-brokered transactions combined several projects run in parallel to settle huge amounts of pension liabilities, in projects lasting 12 months or less from project inception to accounting settlement and buyout.

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A genuine win-win for scheme members and the sponsor:

• Highly valued options were given to members that would not otherwise be available.

• Full personalised financial advice was provided to members.

• The security of an annuity was provided for those members who did not prefer other options.

Both of these sponsor-led projects (fully supported by the trustees) demonstrate how it’s possible to overcome all legal, administrative, and financial obstacles to buyout pension liabilities and offer financial advice and member options (to tens of thousands of members) in parallel. To achieve this over a short period of time requires a combination of bulk annuity broking experience, the ability to hedge investment risks throughout, and, not least, the ability to overcome administrative and data issues and to organise high-quality member-option programmes.

The end result is that the real economic cost of settling all scheme liabilities can be below any desktop actuarial estimate of buyout pricing.

* ETV = Enhanced Transfer Values, WULS = Winding Up Lump Sums, PIE = Pension Increase Exchange, TCLSDB = Trivial Commutation Lump Sum Death Benefits

P H I L I P S O B J E C T I V E : S E T T L E L I A B I L I T I E S D U R I N G 2 0 1 5 F O R A G I V E N C A P I TA L I N J E C T I O N

D e f e r r e d m e m b e r s( n o n - i n s u r e d )

S TA R T I N G P O I N T E N D P O I N T

P e n s i o n e r s( n o n - i n s u r e d )

R o t h e s a yb u y - i n

P r u d e n t i a lb u y - i n s

E T V *W U L S *

P I E *W U L S /

T C L S D B *

P I C B U Y O U T

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PAY W U L S /T C L S D B * O R E T V

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R O T H E S AY A N D P R U D E N T I A L

B U Y O U T S

9 M O N T H S


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0 5 .T H E A R T O F A S S E S S I N G Y O U R S C H E M E ’ S L O N G E V I T Y R I S K A N D D E C I D I N G W H E T H E R T O B U Y P R O T E C T I O N

Phil CaineDemographics and longevity consultant, Bulk Pensions Insurance Advisory

None of us knows for sure how long people will be living in the very long term. Perhaps the significant improvements seen in the early 21st century are a sign of things to come, or maybe it will become harder to progress cures of more aggressive cancers and Alzheimer’s. This long-term uncertainty is the main reason to seek to de-risk longevity. In the absence of crystal balls, we need to do our best to understand where mortality rates will be in the more immediate future.

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In current financial markets, just one year of additional life expectancy could cost a scheme in excess of 5% of their total liabilities. Annuities, both individual and bulk policies, have always provided a way to address longevity risk, with terms based on behind-the-scenes tailored life expectancy estimates, and, in recent years, longevity swaps and medical underwriting have emerged as new ways to specifically insure or assess longevity risk.

Greater volumes of experience data and improved computing power have led to a better understanding by insurers of annuitants’ life expectancies. However, pension schemes of all sizes already have enough data at their disposal to use techniques similar to insurers in estimating the longevity of their members, enabling schemes to:

• Assess the reasonableness of longevity swap pricing.

• Assess the reasonableness of bulk annuity pricing.

• Consider partial or total medical underwriting.

Mercer licences the same industry-leading and academically reviewed longevity analysis techniques as used by the majority of UK insurers, and we’re the only UK consultancy to do so. Having the right technology, together with our own pension scheme experience data collected for more than one million annuitants, plus extensive experience in advising on mortality assumptions for a wide range of clients, enables us to undertake:

• Comparative mortality modelling for smaller schemes: firm, evidence-based assessment of longevity using knowledge of similar individuals in other schemes.

• Bespoke mortality modelling for larger schemes where a significant amount of longevity experience data is available: modelling techniques to assess scheme-specific longevity experience without the constraints of “standard” tables.

• For those in the middle, with some degree of longevity experience data: “credibility-weighted” outcomes that adjust “smaller scheme” studies to make appropriate allowance for the limited experience data held.

Going through an exercise to assess a scheme’s longevity risk will help reduce future insurance premiums by being better informed in negotiations, demonstrating credibility to insurers, and by highlighting in advance the scheme data areas that need correction or clarification.


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PENSION SCHEME DATE £M REINSURER/COUNTERPARTY

Aviva Mar 2014 5,000 Munich Re/Scor/Swiss Re

BT Jul 2014 16,000 Prudential (USA)

Phoenix Group Aug 2014 900 Reinsurance Group of America

MNOPF Jan 2015 1,500 Pacific Life Re

ScottishPower Feb 2015 2,000 Deutsche Bank/Abbey Life

AXA Jul 2015 2,800 Reinsurance Group of America

Scottish & Newcastle Sep 2015 2,400 Friends Life (Aviva)/Swiss Re

RAC Nov 2015 600 Scor

Undisclosed Dec 2015 90 SmartDB (Mercer)/Zurich Assurance

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L A R G E B U L K A N N U I T Y ( A B O V E T H E L I N E ) A N D L O N G E V I T Y S WA P S ( B E L O W T H E L I N E ) 2 0 0 8 – 2 0 1 5

*The mortality swap transactions for BT, £16 billion, and Aviva, £5 billion, would be off the bottom of the table, so are instead shown just below the £3 billion line.

-3,000

2008 2009 2010 2011 2012 2013 2014 2015 2016

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GlaxoSmithKline T&N

EMI Total CAA

NCR ICIICI ICI

Ntn BankLehman Bros

Undisclosed

ICI

UniqC&W Thorn

Babcock

Berkshire Pilkington

RSA

BA BA

Bentley

CarillionPGL

Axa

RAC

Scotts & Newc

BAe

AstraZeneca

Aviva BT

LV=

Akzo NobelITV

BAe

BMW Rolls-Royce

MNOPF

MNOPF

ScottishPower

TRWPhilips


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0 6 .A L I G N I N G I N V E S T M E N T S A S P A R T O F A B U L K A N N U I T Y T R A N S A C T I O N

Suthan RajagopalanFinancial Strategy Group

Negotiating a competitive bulk annuity quote through the brokerage exercise is only the first step towards successfully completing a trade. To secure the pricing basis and maintain affordability in a transparent manner, it’s important to develop a matching investment strategy early in the process prior to exclusivity being given to a single-lead insurer. Coordination of investment negotiations should therefore sit alongside insurer negotiation and selection discussions in order to deliver the most effective combined broking and investment solution, from both a cost and risk perspective.

T h e r i s k c a u s e d b y i n v e s t m e n t m i s m a t c h i n g v e r s u s i n s u r e r p r i c i n g c a n b e f a r g r e a t e r t h a n t h e t r a n s a c t i o n c o s t s , s o s h o u l d b e g i v e n v e r y s i g n i f i c a n t f o c u s .S u c c e s s f u l e x p e r i e n c e o f b u l k a n n u i t y i n v e s t m e n t m a t c h i n g s t r a t e g i e s a n d a s s e t t r a n s i t i o n a r e k e y s t o a s u c c e s s f u l t r a n s a c t i o n .

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A well-developed premium payment strategy should include:

• A transparent price-tracking mechanism by which changes in the insurer’s pricing can be directly justified through observable market data.

• An investible model portfolio (preferably aligned with the above) that serves as a benchmark against which hedging decisions can be assessed while also acting as a potential in-specie portfolio to minimise transaction costs upon asset transfer.

• Regular pricing updates from the insurer.

• The flexibility and stability necessary to support any member option exercises if these are being run as a part of the transaction.

The scheme’s investment strategies can then be restructured in light of the price-tracking framework agreed with the insurer that is granted exclusivity, so that assets are either suitable to directly purchase the bulk

annuity policy upon completion or to hedge market risk throughout the implementation period:

• Transitioning assets into those the insurer will accept can be used to progressively lock in the selected insurer’s price and cut transition costs materially.

• Derivatives can be novated or transitioned more efficiently, minimising or removing the risk of moving market prices.

• Insurer pricing can often be reduced, if the insurer knows it won’t be exposed to the risk of needing to re-invest large amounts of assets during the days and weeks following a bulk annuity purchase.

Schemes that have used successfully extensive pre-transition arrangements include many of the major buyouts over £1 billion, such as Philips, TRW, and T&N. It’s also important to have experience of extracting tranches of assets from within pooled funds, which increases the accessibility of price-tracking portfolios.

M E R C E R B U Y O U T A N D I N V E S T M E N T

A D V I C E

B U L K A N N U I T Y

P R O V I D E R

B O N D M A R K E T

Cash and acceptable

bonds

Liability and currency

hedging swaps

Insurer non acceptable

bonds

Assets progressively traded into insurer price-linked assets

Cash and acceptable

bonds

S C H E M E ’ S L D I

P O R T F O L I O

C O U N T E R PA R T Y B A N K S


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0 7.W H Y A R E I N C R E A S I N G N U M B E R S O F S C H E M E S C A R R Y I N G O U T A P E N S I O N E R B U Y - I N ?

Mike FranksBulk Pensions Insurance Advisory

In exchange for the buy-in premium, the insurer will pay an income stream to the pension scheme that matches the payments made to the insured pensioners. After the transaction is completed, the pension scheme still has the same liabilities, but the funding risk in relation to the pensioners in payment has been removed.

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The popularity of pensioner buy-ins among trustees and scheme sponsors continues to grow as they look for the best ways to manage their long-term risks. Here are some of the reasons pensioner buy-ins are currently thriving:

• Pension schemes don’t have to be fully funded to carry out a pensioner buy-in. Furthermore, most schemes don’t require a cash injection from the sponsor to transact. It’s common for a pensioner buy-in not to give rise to a material strain relative to the full funding reserve that a typical pension scheme would hold for the pensioner liabilities. In fact, many schemes with conservative funding bases transact at prices below their full funding reserve.

• A pensioner buy-in can make the funding of the remaining liabilities easier to manage. Once the funding risk for the pensioner liabilities is removed, trustees and sponsors may be better placed to address the funding of the longer-duration deferred liabilities that remain uninsured.

• Carrying out a pensioner buy-in doesn’t mean the pensioners are being treated more favourably than the deferred members. A pensioner buy-in is held as an investment by the trustees and, consequently, if the pension scheme’s overall funding risk is improved, this benefits all scheme stakeholders.

• Volatility in financial markets hasn’t been a barrier, as the trustees and scheme sponsor are firmly in control of when the transaction takes place. After obtaining initial pricing from insurers, it’s possible to monitor the cost of a pensioner buy-in over an extended period and only proceed when the economics are right. Mercer has worked with many clients on this basis, and extracting this value from the market is a key feature of the Mercer Pension Risk Exchange ® platform (see Article 03).

• Completing a pensioner buy-in doesn’t prevent the scheme’s deferred liabilities from being insured at a later date. Bulk annuity transactions covering just the deferred members are very common.

• Going to market to obtain pricing in respect of pensioner liabilities on a standalone basis has never been easier. As schemes look to better manage their ongoing funding risk, pensioner buy-ins will continue to form a significant part of long-term de-risking strategies.


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0 8 .W I L L I N S U R E R S S TA N D T H E T E S T O F T I M E ?

Marc LohOliver Wyman

W H Y F I N A N C I A L S T R E N G T H O F A N I N S U R E R I S I M P O R T A N T

Selection of an insurer for bulk annuity or similar transactions is a complex process that typically encompasses three crucial factors: price, quality of administration, and financial strength. The latter is important since the trustees and the sponsoring employer must ensure that the chosen insurer has the long-term financial capability to meet the scheme’s liabilities, taking into account the very long-tailed nature of pension payments. Assessing financial strength requires a long-term view focusing not only on short-term issues such as the current solvency position, but also on risks that are more slow burn in nature such as trends in future mortality improvements.

Longevity risk is usually the largest risk factor faced by bulk annuity providers. We would look to the insurer to demonstrate it has sufficient capital and management capability to effectively manage and mitigate this risk. Credit risk on the underlying corporate bonds is another significant risk factor for insurers. With the risk of default in respect of one or more bonds, an assessment needs to be made of how well an insurer has allowed for and managed this. It’s also crucial to consider whether the provider has both the resources and the appetite to take on the risks inherent in a transfer for very large schemes. This is especially challenging for the newer entrants that specialise in bulk annuities, as they would be subject to a greater concentration of risk exposure than the traditional multiline insurers that are able to diversify their risks against other product lines written over many years.

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A N A LY S I N G F I N A N C I A L S T R E N G T H

Our approach and the analysis we carry out depend on the scope required by our clients at any particular time. This, in turn, is often driven by the size of the transaction. For small deals, we may carry out only high-level analyses on public data; whereas, for larger schemes, we go into greater detail and focus on non-public information and arrange to meet members of the insurer’s management team to discuss the latest financial position. We assess various financial strength and key performance indicators using a broad range of quantitative and qualitative analyses, such as:

• Regulatory solvency — We analyse the insurer’s regulatory returns together with report and accounts information, requesting up-to-date data as far as possible. We may also seek non-public data in order to gain insights into the risks the insurer faces and its risk management capabilities. We examine trends in solvency over time and benchmark against peers in order to assess relative financial strength.

• Valuation basis — Assumptions underlying the solvency calculation influence the result in an insurer just as they do in a pension scheme. It’s therefore important to look at the main assumptions and to assess their appropriateness and how they compare with typical market practice.

• Investment strategy — Pensions are long-term financial obligations, and the structure of the investment portfolio the insurer uses to back its liabilities needs to be understood in terms of the level of risk it contains, how that risk has been allowed for, and how well matched it is to the nature of the liabilities.

• Free assets above statutory requirements — An insurer’s “spare cash” is an important factor when considering how the insurer would cope with shocks to its solvency.

• New business capacity — This is particularly relevant for the newer entrants to the market, since writing new business uses up free capital. There is therefore a limit on how many schemes an insurer can take on without unduly affecting its financial strength. We discuss any capital-raising plans with the insurer’s management team and reach a view on how much new business could be written before further capital needs to be injected.

• Group structure of the insurer — We usually focus our analysis on the operating entity writing the business. However, it’s sometimes important to consider the capital position of wider group companies and the extra strength or risks they bring.

• Expense ratios — Acquisition and maintenance expense ratios indicate the efficiency of insurers, which, together with historical information and peer comparisons, give useful information on how costs are managed. This can have an important effect on financial strength over the longer term.

• Financial implications of any options or guarantees — These exist in most insurers, and we examine their nature and how they’ve been allowed for in the insurer’s reserves.


2 2

2008 2009 2010 2011 2012 2013 2014 2015 (estimated)

Market share 2008-

2014/2015 only

Aegon 124 155 26 0 0 0 0 0 1%/0%

Aviva 881 176 873 1,076 188 379 874 984 9%/8%

Canada Life 0 1 1 7 1 0 0 32 0%/0%

Just Retirement & Partnership

0 0 0 0 4 91 688 1,235 2%/10%

Legal & General (L&G) 2,101 1,380 999 1,517 1,056 1,317 5,971 1,938 30%/16%

Pension Insurance Corporation (PIC)

1,665 1,095 703 651 1,469 3,745 2,567 3,811 25%/31%

Prudential 1,124 0 900 338 412 245 1,710 1,508 10%/12%

Rothesay Life 2,081 904 1,758 1,605 1,372 1,730 1,394 2,333 23%/19%

Scottish Widows 0 0 0 0 0 0 0 400 0%/3%

Total 7,976 3,711 5,260 5,194 4,501 7,507 13,203 12,241 100%

L I S T O F B U L K A N N U I T Y A N D L O N G E V I T Y S WA P T R A N S A C T I O N S

A . U K B U L K A N N U I T Y T R A N S A C T I O N S B Y I N S U R E R ( £ M )

The above table shows the total premium paid to insurers by occupational pension schemes, it does not include insurer to insurer back-book premiums.

Due to consolidation within the bulk annuity market, the bulk annuity transactions written by AIG, MetLife Assurance Limited and Paternoster are now shown within Rothesay Life’s figures. Transactions written by Lucida are similarly shown within Legal & General’s figures. The figures for transactions written by Partnership and Just Retirement have been combined, to reflect the ongoing merger.

0 9 .

M A R K E T R E V I E W 2 0 1 6

2 3

Rank Scheme Name Premium (£m) Type Insurer Date Lead Broker

1 TRW 2,500 Pensioners L&G Nov 2014 Mercer

2 Philips 2,400 All PIC Nov 2015 Mercer

3 EMI 1,500 All PIC Jul 2013 Mercer

4 Thorn 1,100 All PIC Dec 2008 Mercer

5 T&N 1,100 All L&G Oct 2011 Mercer

6 Uniq 830 All Rothesay Life Dec 2011 LCP

7 Rank 700 All Rothesay Life Feb 2008 Mercer

8 MNOPF Old Section 680 All Rothesay Life Dec 2012 Towers Watson

9 Lehman Brothers 675 All Rothesay Life Apr 2015 PwC

10 NCR 670 All PIC Nov 2013 Towers Watson

11 Ferranti 600 All Prudential Jun 1999 Mercer

12 LCP 534 All PIC Apr 2015 LCP

13 InterContinental Hotels Group 440 All Rothesay Life Aug 2013 Mercer

14 Powell Duffryn 400 All Paternoster Mar 2008 Hewitt

B . L A R G E S T B U Y O U T S ( E X C L U D I N G B U Y - I N S ) 2 0 0 8 - 2 0 1 5


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Name Size £m Type Insurer Date Mercer Lead Broker

Confidential — Project Victoria (2/2) 208 All PIC Dec 2015 Y

TKW Group 300 All Aviva Dec 2015

Undisclosed 230 Pensioners L&G Dec 2015

Philips Pension Fund (4/4) 2,400 All PIC Nov 2015 Y

Confidential — Project Angus 104 All L&G Nov 2015 Y

Wiggins Teape 400 Pensioners Scottish Widows Nov 2015

Confidential — Project Verona 2015 (3/3)

118 Pensioners Just Retirement Oct 2015 Y

Confidential — Project Brussels 188 PPF rescue PIC Aug 2015 Y

ICI Speciality Chemicals 219 Pensioners Prudential Aug 2015

Civil Aviation Authority 1,600 Pensioners Rothesay Life Jul 2015

ICI (5/6) 480 Pensioners L&G Jun 2015

Alcatel-Lucent 300 Pensioners Aviva Jun 2015

ICI (6/6) 500 Pensioners Prudential Jun 2015

Lehman Brothers 675 All Rothesay Life Apr 2015

Northern Bank 670 Pensioners Prudential Apr 2015

Undisclosed 534 All PIC Apr 2015

ICI (4/6) 500 Pensioners L&G Mar 2015

Taylor Wimpey plc 206 Pensioners Partnership Dec 2014

Confidential — Project Rome 120 All Rothesay Life Dec 2014 Y

Confidential — Project Golf 370 PPF rescue Rothesay Life Dec 2014 Y

Aon Minet (3/3) 210 Pensioners PIC Nov 2014

TRW 2,500 Pensioners L&G Nov 2014 Y

ICI (3/6) 300 Pensioners Prudential Nov 2014

Undisclosed 200 Pensioners PIC Nov 2014

Uniac 129 Pensioners L&G Oct 2014

Makro 185 All Rothesay Life Sep 2014

Philips Pension Fund (3/4) 310 Pensioners Prudential Sep 2014

Confidential — Project Shale (2/2) 124 Pensioners Rothesay Life Aug 2014 Y

Undisclosed 170 Pensioners PIC Jul 2014

Interserve 300 Pensioners Aviva Jul 2014

Total 1,600 Pensioners PIC Jun 2014

Philips Pension Fund (2/4) 304 Pensioners Prudential Jun 2014

Western United Group Pension (3/3) 280 Deferreds Rothesay Life May 2014

Church of England 100 Pensioners Prudential Mar 2014

ICI (1/6) 3,000 Pensioners L&G Mar 2014

ICI (2/6) 600 Pensioners Prudential Mar 2014

Western United Group Pension (2/3) 111 Pensioners Rothesay Life Mar 2014

C . U K B U L K A N N U I T Y T R A N S A C T I O N S ( B U Y - I N S A N D B U Y O U T S ) O V E R £ 1 0 0 M I L L I O N . 2 0 0 8 - 2 0 1 5

M A R K E T R E V I E W 2 0 1 6

2 5


GKN (1/2) 123 Pensioners Rothesay Life Jan 2014

NCR 670 All PIC Nov 2013

Undisclosed 220 All PIC Nov 2013

TI Group (4/4) 170 Pensioners PIC Sep 2013

JLT (1/2) 120 Pensioners Prudential Sep 2013

InterContinental Hotels Group 440 All Rothesay Life Aug 2013 Y

Philips Pension Fund (1/4) 484 Pensioners Rothesay Life Aug 2013

Equitable Life 336 Deferreds L&G Jul 2013 Y

EMI 1,500 All PIC Jul 2013 Y

Cobham 280 Pensioners Rothesay Life Jul 2013

Confidential — Project Victoria (1/2) 102 Pensioners PIC Apr 2013 Y

First Quench 176 PPF rescue PIC Apr 2013

Confidential — Project Green 255 All L&G Mar 2013 Y

Smith & Nephew (main + exec schemes)

190 Pensioners Rothesay Life Jan 2013

Undisclosed 100 Unknown PIC Dec 2012

Tate & Lyle (1/2) 347 Pensioners L&G Dec 2012

MNOPF Old Section (3/3) 680 All Rothesay Life Dec 2012

Undisclosed 122 Unknown PIC Nov 2012

Western United Group Pension (1/3) 115 Pensioners Rothesay Life Nov 2012

General Motors 230 All Rothesay Life Oct 2012

Undisclosed 140 Unknown Prudential Aug 2012

Undisclosed 250 Pensioners L&G Jul 2012

Aon Minet (2/3) 100 Pensioners PIC Jul 2012

Cookson (1/2) 320 Pensioners PIC Jul 2012

Gartmore 162 All PIC May 2012

West Midlands Integrated Transport Authority

272 Pensioners Prudential Apr 2012 Y

SR Technics 198 PPF rescue PIC Apr 2012 Y

DENSO Marstons 200 All PIC Mar 2012

Undisclosed 103 Pensioners PIC Mar 2012

Undisclosed 227 Pensioners Aviva Dec 2011

Undisclosed 111 All Aviva Dec 2011

Uniq 830 PPF rescue Rothesay Life Dec 2011

Smiths 150 Unknown Rothesay Life Dec 2011

Confidential — Project Magenta 149 All MetLife Nov 2011 Y

Meat & Livestock Commission 150 Pensioners Aviva Oct 2011

T&N 1,100 PPF rescue L&G Oct 2011 Y

TI Group (3/4) 150 Pensioners Rothesay Life Sep 2011

C . ( C O N T I N U E D )


2 6


Law Society (2/2) 236 Deferreds MetLife Jun 2011 Y

Undisclosed 122 Unknown L&G May 2011

London Stock Exchange 158 Pensioners PIC May 2011

Home Retail Group 278 Pensioners Prudential May 2011

Industrial Training Board 152 Pensioners PIC Apr 2011

Confidential — Project PenCap 210 All CEL Jan 2011

Undisclosed — Banking sector 185 Pensioners Aviva Dec 2010

GlaxoSmithKline 900 Pensioners Prudential Nov 2010

TBC 220 Pensioners L&G Sep 2010

Next 124 Pensioners Aviva Aug 2010

Alliance Boots 320 All PIC Aug 2010

MNOPF Old Section (2/3) 100 Pensioners Lucida May 2010

Undisclosed — Engineering sector 104 Pensioners Aviva Mar 2010

Aggregate Industries (1/2) 210 Pensioners PIC Feb 2010

Confidential — Project Tahoe (1/3) 102 Pensioners MetLife Jan 2010 Y

Cadbury 500 Pensioners PIC Dec 2009

CDC 370 All Rothesay Life Nov 2009 Y

DENSO Midlands 136 All PIC Sep 2009

MNOPF Old Section (1/3) 500 Pensioners Lucida Sep 2009

Dairy Crest — 2nd transaction 150 Pensioners L&G Jun 2009

Aon Minet (1/3) 150 Pensioners MetLife Jun 2009

Confidential (retail sector) 220 Pensioners L&G Mar 2009

Leyland DAF 230 All PIC Jan 2009

Thorn 1,100 All PIC Dec 2008 Y

Dairy Crest — 1st transaction 150 Pensioners L&G Dec 2008

Cable & Wireless 1,050 Pensioners Prudential Sep 2008

The Pensions Trust 225 Pensioners Paternoster Sep 2008

TI Group (2/4) 250 Pensioners Paternoster Sep 2008

West Ferry Printers 130 Pensioners Aviva Sep 2008

Ofcom 150 Pensioners L&G Jul 2008

Delta 451 Pensioners PIC Jun 2008

Weir Group — 2nd transaction 110 Deferreds L&G Apr 2008 Y

BBA 270 Pensioners L&G Apr 2008

Industry Wide Scheme 160 Pensioners L&G Apr 2008

Friends Provident 350 Pensioners Aviva Apr 2008

TI Group (1/4) 250 Pensioners L&G Mar 2008

Powell Duffryn 400 All Paternoster Mar 2008

M-Real Corporation (UK Paper) 180 All L&G Mar 2008 Y

Morgan Crucible 160 Pensioners Lucida Mar 2008

Rank 700 All Rothesay Life Feb 2008 Y

C . ( C O N T I N U E D )

M A R K E T R E V I E W 2 0 1 6

2 7

Pension Scheme Size £m Date Reinsurer/Counterparty

Undisclosed plan 90 Dec 2015 SmartDB (Mercer)/Zurich Assurance

RAC 600 Nov 2015 Scor

Scottish & Newcastle 2,400 Sep 2015 Friends Life (Aviva)/Swiss Re

AXA 2,800 Jul 2015 Reinsurance Group of America

ScottishPower 2,000 Feb 2015 Deutsche Bank/Abbey Life

MNOPF 1,500 Jan 2015 Pacific Life Re

Phoenix Group 900 Aug 2014 Reinsurance Group of America

BT 16,000 Jul 2014 Prudential (USA)

Aviva 5,000 Mar 2014 Munich Re/Scor/Swiss Re

Carillion 1,200 Dec 2013 Deutsche Bank

BAE (2/2) 1,700 Dec 2013 L&G

AstraZeneca 2,500 Dec 2013 Deutsche Bank/Abbey Life

British Airways (3/3) 280 Dec 2013 Goldman Sachs/Rothesay Life

Bentley 500 May 2013 Deutsche Bank/Abbey Life

BAE (1/2) 3,200 Feb 2013 L&G

LV= 800 Dec 2012 Swiss Re

Akzo Nobel 1,400 May 2012 Swiss Re

British Airways (2/3) 1,300 Dec 2011 Goldman Sachs/Rothesay Life/Pacific Life Re

Pilkington 1,000 Dec 2011 L&G/Hanover Re

Rolls-Royce 3,000 Nov 2011 Deutsche Bank/Scor

ITV 1,700 Aug 2011 Credit Suisse/Pacific Life Re

Pall 70 Jan 2011 JP Morgan

British Airways (1/3) 1,300 Jun 2010 Goldman Sachs/Rothesay Life

BMW 3,000 Feb 2010 Deutsche Bank/Abbey Life

County of Berkshire 750 Dec 2009 Swiss Re

CDC 400 Nov 2009 Goldman Sachs/Rothesay Life

RSA 1,900 Jul 2009 Goldman Sachs/Rothesay Life/Pacific Re

Babcock 1,200 Feb 2009 Credit Suisse

D . U K S C H E M E L O N G E V I T Y S WA P T R A N S A C T I O N S 2 0 0 8 - 2 0 1 5


2 8

C O N TA C T U S

D AV I D E L L I S Bulk Pensions Insurance Advisory 0113 394 7591 [email protected]

H A R R Y H A R P E R Bulk Pensions Insurance Advisory 0161 837 6623 [email protected]

M A R T Y N P H I L L I P S Bulk Pensions Insurance Advisory 01483 777 248 [email protected]

S T E P H E N P U R V E S Bulk Pensions Insurance Advisory 0113 394 7612 [email protected]

N E I L R O G E R S Bulk Pensions Insurance Advisory 0113 394 7589 [email protected]

D AV I D A R K I N S TA L L Bulk Pensions Insurance Advisory 0113 394 7620 [email protected]

A D R I A N M A R S H A L L Bulk Pensions Insurance Advisory 0161 837 6583 [email protected]

P H I L C A I N E Bulk Pensions Insurance Advisory 0161 837 6551 [email protected]

M I K E F R A N K S Bulk Pensions Insurance Advisory 0161 837 6629 [email protected]

S U T H A N R A J A G O PA L A N Financial Strategy Group 020 7178 3669 [email protected]

M A R C L O H Oliver Wyman 01372 389 608 [email protected]

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The findings, ratings, and/or opinions expressed herein are the intellectual property of Mercer and are subject to change without notice. They are not intended to convey any guarantees as to the future performance of the investment products, asset classes, or capital markets discussed. Past performance does not guarantee future results.

This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances.

Information contained herein has been obtained from a range of third-party sources. While the information is believed to be reliable, Mercer has not sought to verify it independently.

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