H E A L T H W E A L T H C A R E E R

D B M E M B E R O P T I O N SI N C R E A S I N G M E M B E R C H O I C E ,R E D U C I N G S C H E M E R I S K

M A R K E T D E V E L O P M E N T S ,E F F E C T I V E D E L I V E R Y

28 June 2016

Alan Baker Matthew Demwell Gary Peterson

2MERCER

MARKET DEVELOPMENTS

EFFECTIVE DELIVERY

Q & A

T O D AY ’ S W E B I N A R

• At-retirement member support• Understanding your member data• Transfer values: finding the “sweet spot”• Making buy-in / buy-out more affordable

• Popular member options• Key drivers

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(C) MERCER 2016 3

Marke t deve lopments

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M A R K E T D E V E L O P M E N T SP O P U L A R M E M B E R O P T I O N S

PIE(PENSIONINCREASEEXCHANGE)

ReFlex(RETIREMENTFLEXIBILITY)

ETV(ENHANCEDTRANSFERVALUES)

SMALL POTS(TRIVIALCOMMUTATIONETC)

Exchange futureannual increases for ahigher income now

Transfer out of the schemeand re-shape benefits onretirement

As ReFlex Exchange smallpension for a cashlump sum

Non-pensioners

Younger ü ü

Older ü ü ü

Pensioners ü ü

What’s in it formembers?

Higher income in moreactive retirement years

Re-shape benefits to meetmember’s ownrequirements

Same as ReFlex Cash sum seen asmore valuable thansmall pension

What’s in it for thescheme / sponsor?

• Reduce inflation,interest rate andlongevity exposure

• Reduce cost ofhedging ortransferringliabilities

• Shrink DB exposure• Reduce future running

costs• Improve long-term

funding position

Same as ReFlex Same as ReFlex

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M A R K E T D E V E L O P M E N T SK E Y D R I V E R S

E T V• Stepping stone to buy-in/buy-out• Funding level may cover

enhancements

R E F L E X• Removes liabilities• Review level of transfer values• Access to DC flexibilities

S M A L L P O T S• Increased limits• Save future running costs• Wider eligible pool of members

P I E• Positive for buy-out, funding and accounting• Makes benefits easier and cheaper to

hedge and insure• Low inflationary environment

C O M M O ND R I V E R S

• Freedom & choiceagenda

• More established andCode has improvedconfidence

• Increased focus on riskmanagement

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(C) MERCER 2016 6

Ef fec t i ve de l i ve ryA t - r e t i r e m e n t m e m b e r s u p p o r t

7MERCER

.

E F F E C T I V E D E L I V E R YA T - R E T I R E M E N T M E M B E R S U P P O R T

�Basic

communicationsonly

�As previous+ illustratealternativebenefits

�As previous

+ high qualitycommunications

+ IFA support

�Transfer valuequotation for all

Member support /understanding

Cost / benefitSelection risk Data securityIFA cost / service /quality control

R e F l e x

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Ef fec t i ve de l i ve ryU n d e r s t a n d i n g y o u r m e m b e r d a t a

9MERCER

-

1,000

2,000

3,000

4,000

5,000

6,000

25 35 45 55 65 75

Tech

nica

lPro

visio

ns(£

000)

Age

Deferreds

-

2,000

4,000

6,000

8,000

10,000

12,000

0 20 40 60 80 100 120

Tech

nica

lPro

visio

ns(£

000)

Age

Pensioners

Dependants

Potential Financial Impact of Member Option Exercises(Technical Provisions)

Note: Impacts can be achieved immediately, except for ReFlex at Retirement where savings and liability reduction appears over time asmembers retire.

Liability Distribution

E F F E C T I V E D E L I V E R YU N D E R S T A N D I N G Y O U R M E M B E R D A T A

Ourpoint of

view

1. Company and Trustees should considerimplementing a range of member option exercises.

2. The Scheme’s technical provisions could bereduced by c£235m and the deficit by c£30m.

3. Reducing the Scheme’s liabilities will reduce thevolatility of the Scheme’s funding position and therisk of additional funding requirements.

4. Utilise initial member option exercise to cross-subsidise further exercises.

Trivial Commutation Bulk ETV / ReFlex ReFlex at Retirement Bulk PIE

OfferTrivial commutation orsmall pot lump sumdepending on eligibility

TVs uplifted to reachFinancial Adviser greenlight (individual offers)

Standard TV (noenhancement)

80% of Balanced Dealamount

Assumed TakeUp Rate 50% 15% ETV

20% ReFlex 25% 30%

Liability Released £3.2m £108.1m £118.9m £5.3m

Asset Used £2.9m £97.9m £106.2m £0.0m

Net Impact +£0.3m +£10.2m +£12.7m +£5.3m

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(C) MERCER 2016 10

E f f e c t i ve d e l i v e r yT r a n s f e r v a l u e s : f i n d i n g t h e “ s w e e t s p o t ”

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25 30 35 40 45 50 55 60 650

5

10

15

20

25

30

35

40

45

50

Liab

ility

per£

1of

pens

ion

Age

The current transfer value basis fallswithin the financial adviser’s

positive recommendation range

The current transfer value basis falls outsidethe financial adviser’s positive

recommendation range (although lessimportant for members over age 55)

Buy-outTechnical provisionsCurrent transfer value basisFinancial adviser 75th percentile line (seebelow)The shaded pink region in the chartrepresents the potential area for which amember would receive a positiverecommendation to transfer based on theirassessed investment risk appetite.

E F F E C T I V E D E L I V E R YT R A N S F E R V A L U E S : F I N D I N G T H E “ S W E E T S P O T ”

• The shaded pink region in the chart represents the potential area for which a member would receive a positive recommendation totransfer based on their assessed investment risk appetite.

• The top of the pink region represents a “cautious” risk appetite member requiring a greater amount of cash now due to lower investmentreturns in the long-term. (invested in lower risk assets) The converse is also true for the “adventurous” risk member at the bottom of thepink region.

• Recent analysis suggests that around 75% of members seeking financial advice have had a risk appetite such that IFAs would be able togive a positive recommendation of a transfer value at the dark pink line.

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Ef fec t i ve de l i ve ryM a k i n g b u y - i n / b u y - o u t m o r e a f f o r d a b l e

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Buy-in/buy-outdeficit

PIE ETV Small pots(including WULS)

Remainingestimated

buy-in/buy-outpremium

Saving againstinitial estimate

Initial buy-outdeficit Combination of steps to reduce buy-out deficit

E F F E C T I V E D E L I V E R YM A K I N G B U Y - I N / B U Y - O U T M O R E A F F O R D A B L E

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A N Y Q U E S T I O N S ?

Q U E S T I O N S

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F E E D B A C K

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Alan BakerPartner, UK DBLeader

Alan.Baker@mercer.com0207 178 5531@notjustpensions

Matthew DemwellPartner, UK Headof Member Options

Matthew.Demwell@mercer.com0207 178 3294

Gary PetersonSenior ActuarialConsultant

Gary.Peterson@mercer.com0207 178 5493