The assurance company’s pension scheme achieved a 40 per cent take-up of its pension increase exchange exercise to manage its longevity risk
The £1.5bn open defined benefit scheme's pensioners received a pension increase exchange offer in November from the scheme's employer.
What the industry code says on Pies
In June, various industry groups supported a new industry code for incentive exercises, which included (but is not limited to) the following for Pies:
Any projections of future pensions should continue to the member's life expectancy, based on their age and sex;
Offers should be accompanied by tailored, one-to-one advice – or guidance, if the offer meets the criteria set out in the code;
Members should be given a two-week cooling-off period to change their mind; and
Pensioners above 80 years of age should receive a short letter about the exercise, rather than the offer pack, and have to opt in to find out more.
They were offered a one-off increase to their pension income in return for giving up future inflation-linked increases. About four in 10 accepted the offer.
The Pie exercise resulted in a £19m drop in the liabilities covering future pension payouts.
"This was a company initiative but the company kept the [scheme] fully informed throughout the process," said the Pearl scheme's annual trustee report to members.
Schemes typically conduct these exercises alongside a series of measures to manage their longevity risk and so increase the security of members' retirement income.
Their employers are keen to conduct these exercises to reduce their pension liabilities but now face an industry code to ensure vulnerable members are not being exploited [see box].
Using Pies to trim liabilities
At the most recent actuarial valuation in 2009, the Pearl pension scheme had a shortfall of £755m and a funding level of 67 per cent.
At June 2011, this level was up to 75 per cent, due to employer contributions, indexation changes and how its investment returns outpaced its liabilities over the period.
More schemes are considering Pies as another derisking tool to reduce their liabilities. Often, the employers will push schemes to accept these in return for making up some of the shortfall.
Ben Roe, an actuary at benefits consultancy Aon Hewitt, said: "It is normally the sponsor going to the trustees [saying], 'we are happy to give you more money on the basis that you are happy to carry out the exercise.'"
In June, schemeXpert.com reported on IT company Fujitsu, which achieved 22 per cent take-up of its Pie offer. Members were provided with a free helpline and modelling tools to decide on the offer.
Most companies are coming to the conclusion that Pies make more sense [than offering ETVs]
Ben Roe, Aon Hewitt
This followed other well-known companies, such as Axa and ITV, which have taken this step over the past couple of years.
However, the number of exercises is still quite low, especially among smaller schemes.
According to Aon Hewitt's Mid-Market Pension Survey 2012 – which contacted 200 schemes with assets of up to £500m each – only 3 per cent had offered Pies.
But a further 15 per cent said they were either somewhat or very likely to implement this derisking programme.
In response to concerns about how employers have conducted these offers, various industry groups established the voluntary code of conduct on Pies and enhanced transfer value exercises.
The Pearl fund declined to comment on the steps it had taken to protect members.
Video: Taylor Wessing's Rosalind Connor on the risks and rewards of Pies
Roe said the introduction of the code made Pies more palatable to schemes, whereas in the past it was a "regulatory black hole".
Current market conditions have also made ETV exercises more expensive for employers to offer, he added.
"It has increased the amount you have to pay out quite considerably, it is quite expensive [to offer ETVs]," he said.
"Most companies are coming to the conclusion that Pies make more sense."
