 Pension Insurance Corporation recently concluded a pension insurance buy-in with the Trustees of the Institute of Cancer Research Pension Scheme to cover £30 Million of liabilities. The Trustees and The Institute of Cancer Research (ICR) were advised by Punter Southall and Towers Watson.Ellie Burns sat down with James Staveley-Wadham and Nick Kenny, both senior consultants in Towers Watson’s retirement group in London, to discuss the ICR buy-in and wider market.
EB: What role did Towers Watson play in this ICR transaction?
JSW: Our role was primarily in advising the ICR, in particular Nick, who as the corporate actuary could use his on-going relationship with the ICR to give advice on the transaction. I work on the bulk annuity side and
Nick’s work with the ICR led to us being able to provide support to the ICR and the trustees during the transaction.
NK: What was seen is quite a common scenario; we looked at the feasibility of buy-in with ICR over a twelve to eighteen month period and then opened the discussion up to the Pension trustees and their advisers.
EB: Unique about the transaction was the monitoring mechanism used; could you give an insight into the process and use of this mechanism?
JSW: What we have seen before in the market is that the trustees and corporate get an annuity quote which might not work, and then what tends to happen is that the client looks at it and finds that it’s not quite there and effectively gives up, which causes the process to fall away.
We didn’t want to see this happen with this transaction as the ICR had invested a huge amount of time and effort and the trustees had selected a counterparty, so we advised to enter into some form of monitoring to leverage the volatility between the premium and the funding basis so that we could still get the deal done.
The first element to implementing the monitoring mechanism was to ensure that all the parties were still committed to the deal and to question how a provider could help them monitor when selecting said provider. We did not want to get into the scenario where, from a fee perspective, there were a lot of consultants and trustee advisors monitoring in parallel and so we were looking at how the provider could help monitor and do a lot of the work. A huge element of this was trust. The provider would be able to see the trustees spending time on the legal documentation, and still committed to the deal, and therefore would be happy to monitor.
NK:The key question put forward in the final selection meeting to the shortlisted three providers was how they would you go about the monitoring phase and the way in which they would handle it.
JSW:It was important that the ICR and trustees were transparent with the provider on the price which they would do the deal. In November 2012 it looked like we were slightly above the target price but everyone was comfortable enough that it was worth proceeding because we knew there was some volatility between the funding liability and the providers pricing.In short, you are starting off with something that is relatively transparent where both parties know they have to invest, and you are starting to build up trust and understanding of how it is going to look.
NK: I think the monitoring period turned out roughly what people were expecting – weeks rather than months We ended up with just under two months of monitoring before going over the line.
JSW: What happened was afterthe provider had been selected, the legal work started off as normal and then the provider went into this monitoring phase, they knew what the price had to be. The provider assessed current pricing on an approximate basis twice weekly and when they thought the price was better the trustees were able to do an updated run.
EB: What is the scope for this monitoring mechanism being used in other transactions?
JSW: I think the use of monitoring in these kinds of transactions are being used as a benchmark in the industry to highlight that these deals can be completed, which is important as many people have experienced deals like these falling away right at the end.It can be used as a case study to say it is possible and if everyone works in a transparent, pragmatic way then you should be comfortable using monitoring. I think key in the use of monitoring is managing people’s expectations. If there is a 15% difference in what the client is prepared to pay and what the provider is charging then monitoring is not going to help.
The key message for people to take away is that all parties have to be transparent, collaborative and be prepared to invest.
NK: All sides in transaction worked collegiately and where prepared to use the provider’s monitoring numbers which was key. If everyone had been fighting for their own advisers to crunch the numbers I’m not sure we would have got anywhere.
EB: Can the size of the transaction affect the use of monitoring?
JSW: Innovation does not have to be restricted to the big end, but can be applied to the small and medium ends. It is important to have flexibility around deal size, in particular when using monitoring, as sometimes it’s easier to do something at the smaller end.
EB: Could you give an insight into how the market in general is performing at the moment and what the key factors in determining the likelihood of a deal?
JSW:Like any market, there are peaks and troughs but the buy-in market remains pretty buoyant.It can depend on where you are starting from, for example if you are holding gilts then it is a good time to exchange the gilts for an annuity. Clients, trustees and advisers should be opportunistic, and I believe this really is key. When an opportunity arises, you should be in a position to grab it and be flexible and opportunistic enough to capitalize on that opportunity and lock it in, rather than being a slave to the journey plan and not capitalizing by waiting on measures to be in place.
NK:The groundwork needs to be done in the background, like having your membership data fit for purpose and benefit specification signed off by the lawyers. Any data issues are just going to lead to delays and/or increase the pricing.
JSW: That is a key point. The basics need to be addressed such as getting the data and governance right. These simple things make it so much more efficient, safer and all around better.
EB: Do you think that there is a tendency to complicate transactions?
JSW: I think there is definitely a danger of that and complication adds risks and delay. An annuity is a very simple beast, and the focus needs to be on the key questions of “Why am I doing this?”,“Am I well prepared?” and “Do I have everything in place?”. It needs to be kept relatively simple and the key messages, again, are to be opportunistic and prepared with the underlying thoughts of “Why am I doing this?” and “At what price does it make sense?”. That is the lynchpin of what we see as a successful transaction.
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