LCP PENSION DE-RISKING QUARTERLY UPDATE Q3 2015

LCP PENSION DE-RISKING QUARTERLY UPDATE Q3 20152015 on track to reach “new normal”of 10bn of buy-ins and buy-outsIN THIS ISSUEWelcome to LCP’s review of thelatest developments in the buy-in,buy-out and longevity swap marketp2Q2 2015 market updatep3Q2 2015 buy-in price monitoringp4 LCP jargon buster: PPF-plusbuy-outIn this edition we look at:De-risking Seminar Record volumes of buy-ins and buy-outs in the secondquarter 201520 OCTOBER 2015 A snapshot of current pension buy-in pricing to help informdecisions on when to approach the marketand corporate representatives from UK LCP jargon buster: what is a PPF-plus buy-out and when doeshow the supply of longevity insurance andVolume of buy-ins and buy-outs from 2007 to H1 201512H1attractive assets impact on your decisionwhen and how to tackle risk.H2What we will cover? billion10 De-risking strategy8 Longevity risk removal: the perspective of6a global reinsurer4 Asset sourcing: views from our panel of20defined benefit pension schemes ( 500m of liabilities). It will provide insight intoit make sense?14This half day session is designed for trusteesexperts, specialising in sourcing long200720082009Source: Insurance company data201020112012201320142015dated, low risk assets Introducing our new longevity risk toolRegister on the LCP events page

LCP Pensions de-risking quarterly update Q3 20152Boost for buy-ins and buy-outs in the secondquarter of 2015Volumes for buy-ins and buy-outs hit a Q2 recordBuy-in/ buy-out premiums ( m)level - the highest for a second quarter at 3.6billion. This marks a significant boost in /an/an/afollowing a steady first quarter, taking the total forAvivathe half year to 4.4bn.Canada Life2Just Retirement9316125487The volumes were driven by seven mid-sizedLegal & General6445011,1463,133transactions (between 300m and 700m) totallingPartnership24446837 3.7bn over the half year. This is in contrast to thePIC406406811,807first half of 2014 which was dominated by two multi-Prudential01,1741,1741,030billion transactions: the 3.6bn buy-in by ICI PensionRothesay Life06751675581Fund and the 1.6bn buy-in by Total’s pension plan.Scottish Widows2n/an/an/an/aTotal8043,6004,4056,938The largest transaction over the first half of 2015was a 680m buy-in by the Northern Bank PensionSource: Insurance company data. Note numbers may not total dueto rounding.Scheme with Prudential in April. This made1Prudential the market leader over Q2 2015 writing2 1.2bn of business.market in the second half of 2015 so have no business in 2015 H1.With a flurry of further activity in July, volumes forExcludes the 1.3bn transfer of annuities from Zurich to Rothesay Life.Canada Life and Scottish Widows have entered the bulk annuityLongevity swaps in 2015 ( m)2015 have now reached nearly 6bn and are on trackPensionto reach 10bn for the year – a level of activity thatschemeLCP anticipated would be the ‘new normal’ at the endScottishof 2014.Transactions in July included a 1.6bn buy-in byIntermediaryQ1Q2Q3TotalAbbey Life(DeutscheBank)2,000--2,000MNOPFMNOPF IC Ltd(captiveinsurer)1,500AXA UKNo third Rothesay Life with the Civil Aviation AuthorityPension Scheme, the largest buy-in or buy-out of2015 to date. July also saw the largest longevityswap of the year at 2.8bn by the AXA UK PensionScheme with the reinsurer RGA.Total1,500Source: Publically announced transactions to end of August 2015.LCP has continued our success of helping clientscomplete attractive buy-ins and buy-outs into 2015,Further details of previous years can be found inbeing lead adviser on five out of the seven buy-insLCP’s report “Buy-ins, buy-outs and longevity swapsand buy-outs over 100m in the first half of 2015.2014” available here.

LCP Pensions de-risking quarterly update Q3 20153Insurer consolidation and new entrants drivebuy-in and buy-out pricingMergers bring additional capacityNew entrants into the marketRecent months have seen consolidation in theCanada Life is the latest insurer to confirm itsinsurance sector, with Aviva and Friends Lifeentry to the market. This follows Scottish Widows’completing a merger in April and Just Retirementannouncement earlier this year. Neither insurerand Partnership announcing a merger in August.has yet completed any transactions, but they willBoth anticipate that the mergers will strengthenprovide welcome extra competition and capacitycapital positions under Solvency II giving greaternext year to offset some of the pricing pressurecapacity to write buy-ins and buy-outs next year.from upward demand.Medical underwritingSolvency II to push up pricing in 2016?Pricing for smaller pensioner buy-ins has continuedFrom 1 January 2016 insurers will need to fullyto be favourable over 2015 due to fierce competitioncomply with Solvency II (business this year benefitsfor “medically underwritten” processes. Therefrom transitional protections). Insurers will notis a real risk that competition could ease in 2016receive final approvals for their models untilfollowing the merger of Just Retirement andDecember 2015 but the latest indications are thatPartnership. However, the combined medicalthere will be little impact for pensioner pricing butexpertise may allow more favourable pricing in somesome insurers may see a price tick-up for non-instances than either insurer can currently offer onepensioners – perhaps up to 3%. We expect this willa stand-alone basis.diminish over time as insurers optimise their capitalmodels and asset strategies for Solvency II.LCP Visualise’s online insurer price tracker is based on directpricing feeds from key insurers in the market. For a typicalscheme the pricing range remains close to a “gilts-flat” valuation.LCP Visualise helps pension plantrustees and sponsors identify whento approach the market, based on arange of indicative insurer pricing.To access visit: lcpvisualise.com

LCP Pensions de-risking quarterly update Q3 20154What is a PPF-plus buy-out and when does itmake sense?LCP Jargon BusterWhen might Trustees compromise a section 75 debtThis typically involves a restructuring of the sponsorand seek to insure higher than Pension Protectionallowing a one-off cash injection to be made to theFund (PPF) benefits with an insurer?scheme in exchange for discharging the sponsor fromfurther pension obligations.In July, MIRA completed a “PPF-plus” buy-out allowingthe company to continue without the scheme, whichThis could be sufficient to secure benefits above PPFwas transferred to an insurer. Such transactions remaincompensation providing a better outcome than therare (Uniq undertook a similar transaction in 2010)scheme entering the PPF. The Pensions Regulatorbut can make sense where the sponsor’s underlyingwould typically need to approve the terms of thebusiness has value but is severely constrained by theagreed arrangement.pension scheme.What differentiates a PPF-plus buy-out?This approach was adopted by the MIRA scheme,providing certainty for members and was consideredA PPF-plus buy-out ensures members are better offto be the best outcome that was realistically achievablethan if the scheme had entered the PPF. The benefitsgiven the size of the pension obligations relative to thesecured with the insurer are lower than full schemebusiness.benefits that members are entitled to, but higherthan those provided by the PPF (ie “PPF-plus”). ForWhen does a PPF-plus buy-out make sense?a solvent employer this means that the Trustee is compromising the full section 75 debt payable to thescheme by accepting less than full scheme benefits.unaffordable for the sponsor. liabilities at a cost that is lower than the full buy-outdebt, as demonstrated by the recent MIRA transaction.Where the pension scheme is preventing thecompany from raising investment or capital.If the circumstances support this approach, a PPF-plusbuy-out can be done pre-emptively to remove pensionWhere deficit contributions are potentially Where eventual insolvency appears otherwiseinevitable.Such schemes can choose to wait for the position toimprove but this may not be the best outcome forWhy consider a PPF-plus buy-out whilst themembers. Finding an early solution may unlock moresponsor is solvent?value for members in the long-term.A PPF-plus buy-out can be worth considering where asponsor’s business is viable but is severely constrainedby the pension scheme. If the most likely outcome iseventual sponsor insolvency with the scheme enteringthe PPF then it is in the scheme’s best interests tomaximise the value that can be realised from thesponsor.If the sponsor could secure new investment in theabsence of the pension scheme liabilities then a one-offnegotiated settlement may deliver a better outcome formembers than the status quo.How LCP can helpLCP has been appointed to some of the mosthigh profile PPF-plus buy-outs including thoseby 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.