longevity risk transfer transactions current trends and...
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1 For financial professional or institutional plan sponsor use only.
Longevity Risk Transfer Transactions Current Trends and Developments
Primary Competency:
Moderator: Presenter:
Moderator: Vladimir Nicenko, Partner, Willkie Farr & Gallagher LLP
Speakers: Amy Kessler, SVP & Head of Longevity Risk Transfer, Prudential Retirement Mick Moloney, Partner, Oliver Wyman Peter Nakada, Managing Director of Risk Markets, Risk Management Solutions, Inc.
ACLI Annual Conference 2013 New Orleans | October 27-29
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2 For financial professional or institutional plan sponsor use only.
When the pension plan gets in the way of the business plan,
leading companies around the world turn to pension risk transfer.
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Pension plan sponsors are surrounded by risk.
For financial professional or institutional plan sponsor use only.
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Twice in the past 12 years, U.S. sponsors of defined benefit plans have lost over funded status in market downturns. 30%
Funded Status Volatility Has Been Excruciating and Very Expensive
Source: Milliman 100 Pension Funding Index; the 100 largest U.S. corporate pension plans as of August 31, 2013.
U.S. Plans
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The Retired Lifetime of Americans Has Increased Significantly in the Last 40 Years
Source: CDC
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Western Pension Funds Could Take A Trillion Dollar Hit Over the Next 30 Years
1-in-100 +4.7 years $1 trillion
Scenario 20501005 • Advances in individualized
medicine • Biomarkers decrease drug
development time, cost • Extreme cancer mortality
reduction – Lifestyle changes – Active screening – Aggressive government
regulation of carcinogens
7 For financial professional or institutional plan sponsor use only.
Companies Choose a Solution Based on Their Needs
Source: Lane Clark & Peacock LLP
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Buy-out
• Complete settlement of plan liability • Insurer covers investment and longevity risk
Turner & Newall, Nov. 2011; £1.1 billion; Restructuring
General Motors, Nov. 2012; $25 billion; Risk reduction
Verizon, Dec. 2012; $7.5 billion; Risk reduction
8 Chart source: Lane Clark & Peacock LLP
9 For financial professional or institutional plan sponsor use only.
Buy-in
• Plan investment that perfectly matches liability • Insurer covers investment and longevity risk
Uniq, Dec. 2011; £830 million; Restructuring
Cadbury, Dec. 2009; £500 million; M&A
British Air, July 2010; £1.3 billion; Opportunistic de-risking
9 Chart source: Lane Clark & Peacock LLP
10 For financial professional or institutional plan sponsor use only.
Longevity Risk Transfer
• Converts unknown future liability into fixed liability cash flow • Insurer covers only longevity risk
Berkshire County, Dec. 2009; £750 million
Rolls-Royce, Nov. 2011; £3 billion
British Aerospace, Feb. 2013; £3.2 billion
10 Chart source: Lane Clark & Peacock LLP
11 For financial professional or institutional plan sponsor use only.
Longevity Risk Investment Risk
Buy-out
Complete settlement of plan liability
Turner & Newall General Motors Verizon
Buy-in
Plan investment that perfectly matches liability
Uniq Cadbury British Air
Longevity Risk Investment Risk
Longevity Risk Transfer
Converts unknown future liability into fixed liability cash flow
Berkshire County Rolls-Royce British Aerospace
Longevity Risk
Chart source: Lane Clark & Peacock LLP
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How Do Our Clients Choose a Solution?
ANY ANY NONE ANY
LARGE HIGH HIGH SOME
Scale Funded Status
Fixed Income Allocation
Risk Retention
Buy-out / Buy-in
Longevity Risk Transfer
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Canada
2013
United States
2012
Netherlands
2012
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Additional perspective on cost
• Relative value of two options provides economic framework – Investment policy drives option
volatility – Funding policy a decision around
best source of borrowing
• Joint funding and investment policy decision-making suggests three categories
• Highlights importance of corporate vs. fiduciary perspective
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16 16 © Oliver Wyman October 23, 2013
% of respondents
Source: Mercer/CFO Magazine Evolving Pension Risk Strategies report, 2013
Act
ion
to b
e ta
ken
in
the
next
2 y
ears
Planned actions by CFO/Treasurers of US corporates
Expected demand Momentum clearly continued to build in 2013
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Distribution of US retiree obligations
Source: Oliver Wyman and Mercer analysis, Schedule 5500s / SB
Plans with $1B+ in retiree obligations account for ~60% of overall obligations
Expected demand The market is concentrated in jumbo plans
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Market structure Only a limited number of insurers can currently compete credibly for jumbo deals
$50 - $500M
$500M - $1B $1B - $2B $2B - $5B
$5B - $10B >$10B
Retiree obligation
~200 BN ~100 BN ~100 BN ~150 BN ~150 BN ~300 BN
Credible insurers
Many ~8 ~8 ~3 - 4 2-3 2-3
Source: Oliver Wyman analysis, Schedule 5500s / SB
For financial professional or institutional plan sponsor use only.
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Relative importance by plan size
Issue Small
0 – $100 MM Large
$100 MM – $1 BN Jumbo > $1 BN
1 “Safest available annuity” according to 95-1
2 Structural security (e.g. separate account)
3 Ability to accept in-kind assets
4 Willingness to accept post-lump sum offers
Plan sponsor concerns and relative importance
Note: 95-1 requirements are covered on the following pages. For more detail on issues 2-5, please see Appendix pages 44-47
Deal dynamics Issues for Insurers
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Deal dynamics What deal features did we see?
Dedicated resources, deal / change management infrastructure
Fiduciary
• In kind asset transfer
• Retiree lump sums
• Use of forward agreements on annuity contract
• Use of independent fiduciary
• Separate advisors
• Separate account structure
Corporate plan sponsor
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Longevity modeling now considers the drivers of longevity improvement explicitly . . .
Lifestyle
2013
Medical Intervention
NOW
Health Environment
LATER
Regenerative Medicine
Retardation of Aging
2025 2050 MUCH LATER
1
2
3
4 5
© Risk Management Solutions
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. . . Including new innovation and burnout for each driver of improvement
© Risk Management Solutions
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Model output is a simulated set of correlated qx tables
© Risk Management Solutions
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We can quantify the offset between mortality risk and longevity risk
US Term Life vs US Annuity
© Risk Management Solutions
25 For financial professional or institutional plan sponsor use only.
We can quantify the offset between mortality risk and longevity risk
US Term Life vs UK Annuity
© Risk Management Solutions
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Life insurers are the most efficient holders of longevity risk
© Risk Management Solutions
27 For financial professional or institutional plan sponsor use only.
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The Milliman 100 Pension Funding Index projects the funded status for pension plans included in the annual Milliman study of the 100 largest defined benefit plans sponsored by U.S. public companies, reflecting the impact of market returns and interest rate changes on pension funded status, utilizing the actual reported asset values, liabilities, and asset allocations of the companies’ pension plans.
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