Feature: Many more schemes are expected to explore derisking avenues such as buy-ins and buyouts in 2016, but whether to press ahead will come down to affordability, which hinges on at least three key factors.
Solvency II
The insurance sector is undergoing significant change, with the Solvency II rules on reserving requirements having come into force on January 1 this year.
Several consultants say that as a result of the new reserving regime, the price for transferring liabilities will remain broadly the same for pensioners, while there could be an increase for deferred members of around 3 per cent.
The full details of the new regime were not clear before its implementation and insurers are still adjusting to the rules, says Tiziana Perrella, head of buyouts at consultancy JLT Employee Benefits.
“Some say that for deferred members there will be a small increase, and some insurers say they might have overestimated and there might be a small reduction,” she says.
Assessing pricing could be difficult at the start of the year, however, when business tends to be slower after the December rush to get deals done.
We had one insurer suggest that maybe the pricing would be a little bit more favourable if you waited a bit longer
Mark Paxton, Barnett Waddingham
Perrella says she has not had any quotations in the first half of January, as some insurers are asking for extra time to check that their models and approval process are fully compliant with the new regime, “so it is creating a little bit of uncertainty in terms of delivery”.
But Clive Wellsteed, partner and head of derisking practice at consultancy LCP, disagrees about insurers being underprepared.
“I think most insurers have got their ducks lined up in working out where pricing would be,” he says.
Mark Paxton, actuarial consultant at Barnett Waddingham, says “some of the insurers may be a bit careful about getting to grips with Solvency II” and there could “maybe be a little bit of to-ing and fro-ing and seeing how things go”.
However, he says trustees are well advised to wait until later in the year with getting quotes in any case: “We had one insurer… suggest that maybe the pricing would be a little bit more favourable if you waited a bit longer.”
Market rejigging
But it is not just Solvency II that makes the direction of pricing in 2016 difficult to call.
The announced merger of insurers Just Retirement and Partnership in the first quarter of this year, as well as the arrival of two new market participants, is set to shake up the competitor arena of currently nine insurers. Some say this could mean higher pricing, as for insurers the cost of providing a quote remains the same, while the chances of winning a deal are reduced.
Scottish Widows entered the scene completing a £400m pensioner buy-in with the Wiggins Teape Pension Scheme last year, while Canada Life joined the market bagging a £5m pensioner buyout for Oundle School.
A third new entrant is widely expected to be mutual insurer LV=, although nothing has been officially announced as yet.
The fresh blood is likely to make the market more diverse; Perrella says the trick will be to know which insurer to approach for what.
“In practice, for consultants the big challenge is to make it as efficient a market as possible,” she says. This involves understanding what each insurer is best at and what their risk and asset preferences look like.
Medically underwritten deals set to increase
Some insurers specialise in medically underwritten buy-ins, for which scheme members are asked to provide information about their health and lifestyle.
We have a fairly good view of where the average longevity will come out for a particular scheme. I think therefore it’s a bit more obvious that there will be winners and losers
Phillip Beach, Legal & General
This sector has grown quite significantly; a recent report by the Pensions Institute says medically underwritten deals accounted for 15 per cent of transactions in 2015, up from 3 per cent in 2013.
The idea is that medical information is more reliable to predict longevity than postcodes, gender or occupation. This helps insurers to more accurately price the risk they are taking on and potentially helps schemes to reduce the cost of a buy-in – especially if members are in worse than average health.
Andrew Gething, managing director of data collection company MorganAsh, says: “Health data is just another level of data… it’s just a bit more tricky to get.”
The discounts schemes can achieve are “in the high single figure usually”, he says.
Medically underwritten deals “tend to be very focused on top-slicing”, a type of buy-in that insures the pension liabilities of the highest earners in a scheme, says Francis Fernandes, senior adviser at covenant specialist Lincoln Pensions.
But he caveats that trustees should think carefully before asking for medical information from members, as for those that do, the road to the ‘plain vanilla’ insurance market becomes blocked.
“Once you’ve collected that information it’s disclosable to the insurer,” says Fernandes.
Phillip Beach, head of core business UK pension risk transfer at insurer Legal & General, says medical underwriting is here to stay and is “something people understand and like to talk about”.
He says L&G has been selective in the deals it closed, however, and cautions trustees not to assume that such transactions will always work out in their favour.
“I see some of the presentations and hear some of the views on medical underwriting. And sometimes I think it’s presented as a one-way bet,” Beach says.
“Now I certainly don’t share that view, I think it’s much more of a two-way bet.”
Large insurers with a long history have significant data on their books from individual as well as bulk annuities and also use external data, says Beach.
“[We] have a fairly good view of where the average longevity will come out for a particular scheme. I think therefore it’s a bit more obvious that there will be winners and losers.”
