IN THIS ISSUE
p2 Q2 2015 market update
p3 Q2 2015 buy-in price monitoring
p4 LCP jargon buster: PPF-plus
buy-out
In this edition we look at:
� Record volumes of buy-ins and buy-outs in the second
quarter 2015
� A snapshot of current pension buy-in pricing to help inform
decisions on when to approach the market
� LCP jargon buster: what is a PPF-plus buy-out and when does
it make sense?
LCP PENSION DE-RISKING QUARTERLY UPDATE Q3 2015
2015 on track to reach “new normal” of £10bn of buy-ins and buy-outs
Welcome to LCP’s review of the latest developments in the buy-in, buy-out and longevity swap market
De-risking Seminar20 OCTOBER 2015
Volume of buy-ins and buy-outs from 2007 to H1 2015
Source: Insurance company data
0
2
4
6
8
10
12
14
2007 2008 2009 2010 2011 2012 2013 2014 2015
£ b
illio
n
H1 H2
This half day session is designed for trustees
and corporate representatives from UK
defined benefit pension schemes (£500m+
of liabilities). It will provide insight into
how the supply of longevity insurance and
attractive assets impact on your decision
when and how to tackle risk.
What we will cover?
� De-risking strategy
� Longevity risk removal: the perspective of
a global reinsurer
� Asset sourcing: views from our panel of
experts, specialising in sourcing long-
dated, low risk assets
� Introducing our new longevity risk tool
Register on the LCP events page
LCP Pensions de-risking quarterly update Q3 2015 2
Volumes for buy-ins and buy-outs hit a Q2 record
level - the highest for a second quarter at £3.6
billion. This marks a significant boost in transactions
following a steady first quarter, taking the total for
the half year to £4.4bn.
The volumes were driven by seven mid-sized
transactions (between £300m and £700m) totalling
£3.7bn over the half year. This is in contrast to the
first half of 2014 which was dominated by two multi-
billion transactions: the £3.6bn buy-in by ICI Pension
Fund and the £1.6bn buy-in by Total’s pension plan.
The largest transaction over the first half of 2015
was a £680m buy-in by the Northern Bank Pension
Scheme with Prudential in April. This made
Prudential the market leader over Q2 2015 writing
£1.2bn of business.
With a flurry of further activity in July, volumes for
2015 have now reached nearly £6bn and are on track
to reach £10bn for the year – a level of activity that
LCP anticipated would be the ‘new normal’ at the end
of 2014.
Transactions in July included a £1.6bn buy-in by
Rothesay Life with the Civil Aviation Authority
Pension Scheme, the largest buy-in or buy-out of
2015 to date. July also saw the largest longevity
swap of the year at £2.8bn by the AXA UK Pension
Scheme with the reinsurer RGA.
LCP has continued our success of helping clients
complete attractive buy-ins and buy-outs into 2015,
being lead adviser on five out of the seven buy-ins
and buy-outs over £100m in the first half of 2015.
Buy-in/ buy-out premiums (£m)
Q1
2015
Q2
2015
H1
2015
H1
2014
Aviva 2 405 407 263
Canada Life2 n/a n/a n/a n/a
Just Retirement 93 161 254 87
Legal & General 644 501 1,146 3,133
Partnership 24 44 68 37
PIC 40 640 681 1,807
Prudential 0 1,174 1,174 1,030
Rothesay Life 0 6751 675 581
Scottish Widows2 n/a n/a n/a n/a
Total 804 3,600 4,405 6,938
Source: Insurance company data. Note numbers may not total due
to rounding.
1Excludes the £1.3bn transfer of annuities from Zurich to Rothesay Life.
2Canada Life and Scottish Widows have entered the bulk annuity
market in the second half of 2015 so have no business in 2015 H1.
Longevity swaps in 2015 (£m)
Pension
schemeIntermediary Q1 Q2 Q3 Total
Scottish
Power
Abbey Life (Deutsche
Bank)2,000 - - 2,000
MNOPFMNOPF IC Ltd
(captive insurer)
1,500 1,500
AXA UK No third party intermediary
- - 2,800 2,800
Total 3,500 - 2,800 6,300
Source: Publically announced transactions to end of August 2015.
Boost for buy-ins and buy-outs in the second quarter of 2015
Further details of previous years can be found in
LCP’s report “Buy-ins, buy-outs and longevity swaps
2014” available here.
3LCP Pensions de-risking quarterly update Q3 2015
Insurer consolidation and new entrants drive buy-in and buy-out pricing
Mergers bring additional capacity
Recent months have seen consolidation in the
insurance sector, with Aviva and Friends Life
completing a merger in April and Just Retirement
and Partnership announcing a merger in August.
Both anticipate that the mergers will strengthen
capital positions under Solvency II giving greater
capacity to write buy-ins and buy-outs next year.
Medical underwriting
Pricing for smaller pensioner buy-ins has continued
to be favourable over 2015 due to fierce competition
for “medically underwritten” processes. There
is a real risk that competition could ease in 2016
following the merger of Just Retirement and
Partnership. However, the combined medical
expertise may allow more favourable pricing in some
instances than either insurer can currently offer one
a stand-alone basis.
New entrants into the market
Canada Life is the latest insurer to confirm its
entry to the market. This follows Scottish Widows’
announcement earlier this year. Neither insurer
has yet completed any transactions, but they will
provide welcome extra competition and capacity
next year to offset some of the pricing pressure
from upward demand.
Solvency II to push up pricing in 2016?
From 1 January 2016 insurers will need to fully
comply with Solvency II (business this year benefits
from transitional protections). Insurers will not
receive final approvals for their models until
December 2015 but the latest indications are that
there will be little impact for pensioner pricing but
some insurers may see a price tick-up for non-
pensioners – perhaps up to 3%. We expect this will
diminish over time as insurers optimise their capital
models and asset strategies for Solvency II.
LCP Visualise’s online insurer price tracker is based on direct
pricing feeds from key insurers in the market. For a typical
scheme the pricing range remains close to a “gilts-flat” valuation.
LCP Visualise helps pension plan
trustees and sponsors identify when
to approach the market, based on a
range of indicative insurer pricing.
To access visit: lcpvisualise.com
LCP Pensions de-risking quarterly update Q3 2015 4
LCP Jargon Buster
When might Trustees compromise a section 75 debt and seek to insure higher than Pension Protection Fund (PPF) benefits with an insurer?
In July, MIRA completed a “PPF-plus” buy-out allowing
the company to continue without the scheme, which
was transferred to an insurer. Such transactions remain
rare (Uniq undertook a similar transaction in 2010)
but can make sense where the sponsor’s underlying
business has value but is severely constrained by the
pension scheme.
What differentiates a PPF-plus buy-out?A PPF-plus buy-out ensures members are better off
than if the scheme had entered the PPF. The benefits
secured with the insurer are lower than full scheme
benefits that members are entitled to, but higher
than those provided by the PPF (ie “PPF-plus”). For
a solvent employer this means that the Trustee is
compromising the full section 75 debt payable to the
scheme by accepting less than full scheme benefits.
If the circumstances support this approach, a PPF-plus
buy-out can be done pre-emptively to remove pension
liabilities at a cost that is lower than the full buy-out
debt, as demonstrated by the recent MIRA transaction.
Why consider a PPF-plus buy-out whilst the sponsor is solvent?A PPF-plus buy-out can be worth considering where a
sponsor’s business is viable but is severely constrained
by the pension scheme. If the most likely outcome is
eventual sponsor insolvency with the scheme entering
the PPF then it is in the scheme’s best interests to
maximise the value that can be realised from the
sponsor.
If the sponsor could secure new investment in the
absence of the pension scheme liabilities then a one-off
negotiated settlement may deliver a better outcome for
members than the status quo.
This typically involves a restructuring of the sponsor
allowing a one-off cash injection to be made to the
scheme in exchange for discharging the sponsor from
further pension obligations.
This could be sufficient to secure benefits above PPF
compensation providing a better outcome than the
scheme entering the PPF. The Pensions Regulator
would typically need to approve the terms of the
agreed arrangement.
This approach was adopted by the MIRA scheme,
providing certainty for members and was considered
to be the best outcome that was realistically achievable
given the size of the pension obligations relative to the
business.
When does a PPF-plus buy-out make sense?
� Where deficit contributions are potentially
unaffordable for the sponsor.
� Where the pension scheme is preventing the
company from raising investment or capital.
� Where eventual insolvency appears otherwise
inevitable.
Such schemes can choose to wait for the position to
improve but this may not be the best outcome for
members. Finding an early solution may unlock more
value for members in the long-term.
What is a PPF-plus buy-out and when does it make sense?
How LCP can help
LCP has been appointed to some of the most high profile PPF-plus buy-outs including those by MIRA and Uniq.
For schemes in similarly difficult circumstances, we can help identify appropriate solutions.
To find out more please call us on +44 (0)20 7432 6644.
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LCP is a firm of financial, actuarial and business consultants, specialising in the areas of pensions, investment,
insurance and business analytics.
The LCP Pensions de-risking quarterly update is based on our current understanding of the subject matter and relevant legislation which
may change in the future. Such changes cannot be foreseen. This document is prepared as a general guide only and should not be taken
as an authoritative statement of the subject matter. No responsibility for loss occasioned to any person acting or refraining from action as
a result of any material in this Update can be accepted by LCP.
Stay Informed View a full list of our de-risking services at www.lcp.uk.com/derisking Get the latest updates from LCP via Twitter. Use hashtag #lcpbuyout and join the conversation.
Clive Wellsteed
Partner & Head of [email protected]
LCP led over 50% of large buy-ins and buy-outs that completed in 2014*Want to know why?Contact us to discuss the work we have been doing and
how we can help you identify opportunities for your
pension scheme.
WINNER
@LCP_Actuaries
*LCP was lead adviser on 12 of the 21 buy-ins and buy-outs over £100m in 2014
+44 (0)20 7432 6644
Charlie Finch
Myles [email protected]
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