With UK pension funds boasting over £1 trillion worth of liabilities, a new Engaged Investor report – sponsored by Partnership and JLT Employee Benefits – asked over 100 UK pension trustees their views on de-risking and the medically underwritten bulk annuity market.
The report – entitled ‘Taking Risk Off the Table’ – revealed the following key points:
De-risking Market:
- Almost half of schemes (44%) were worried about their funding position with a further 44% citing longevity risk as the greatest threat. Schemes also expressed concerns about the impact of regulation (39%) and the low-yield environment (38%);
- Understandably, the most popular de-risking exercises were initially internally focused - closing to new members (29%), pursuing a liability-driven investment strategy (24%) and closing to future accrual (18%). When these had been reviewed, schemes typically looked at buy-ins (6%), pension increase exchange (4%) or longevity swaps (2%);
- Schemes chose their de-risking strategy due to their own individual needs with 70% saying that impact on risk was their top priority. While cost is naturally a consideration, just 7% cited this as the most important factor;
- The financial security of the de-risking firm was a consideration and two-thirds of schemes who had already been through a buy-in or buyout had chosen to go through a covenant assessment, and all believe it was important;
- Advice was considered vital for schemes embarking on a de-risking exercise with 41% looking to their actuaries and 36% looking to investment consultants. Even schemes which had as yet not undertaken this type of exercise recognised the value of advice and 70% said they would use an adviser.
Medically Under-Written Deals:
- Almost a third (29%) of schemes said their knowledge of medically underwritten bulk annuities was fair, while 18% rated their knowledge as good. Only 12% said they had never heard of this strategy;
- Almost two-thirds (60%) said their actuaries had not offered them the choice to take individual life expectancies into account – a serious oversight as this could have a positive impact on cost;
- Only 11% of respondents had considered using medically underwritten bulk annuities – with some suggesting that something ‘they may consider in the next few years’;
- Lack of understanding of the market was also a barrier with two-thirds unsure whether medically underwritten deals could reduce costs (typically this process can) and 94% saying that members would be reluctant to reveal medical information (in practice 80% response rates can be achieved).
Costas Yiasoumi, Director of Defined Benefit Solutions at Partnership, commented: “The bulk-annuity market is extremely buoyant with a number of high-profile deals undertaken in the last year. Therefore, we were keen to understand more about the views of trustees on de-risking and their thoughts on medically under-written bulk annuities. The report clearly highlights the breadth of approaches taken by schemes in their de-risking journey with bulk annuities remaining an ultimate goal for many. When choosing de-risking, the impact on risk mitigation as well as the financial stability offered by regulated insurance companies were key factors.
“Medically underwritten bulk annuities can offer significant savings and we are seeing strong demand from trustees, but lack of familiarity still means some schemes are currently not choosing to go down this route. This compares to the retail annuity market where over 50% of cases that go to the open market are medically underwritten. We are working hard to educate the industry about the usage of medically underwritten bulk annuities and the report confirms that in the future an increased number of schemes will consider this route.”
Martyn Phillips, Director, Head of Buyouts at JLT Employee Benefits, said: “2014 has been a transformational year for pension scheme de-risking. Not only have we seen record-breaking buy-ins (the ICI £3bn trade with L&G) but we have witnessed transactions well beyond the limits of what was commonly viewed as the ceiling for trades (the BT £16bn longevity swap).
“In addition, the Budget has shaken up the pension’s world and is opening up new de-risking opportunities for pension schemes. The resulting contraction in the retail annuity market has encouraged providers to expand their offering in the bulk annuities market. As both advisers and insurers endeavour to deliver support and solutions aligned with pension schemes’ needs, the opportunity for trustees to successfully develop, refine and implement an “end game” strategy has never been greater.”
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