lcp pensions de-risking update september 2016 2016 …€¦ · lcp pensions de-risking update...
TRANSCRIPT
IN THIS ISSUE
p2 Pricing and market update
p3 H1 2016 activity
p4 Understanding longevity risk
In this edition we look at:
� Which insurers have been most active in the first half of 2016
� Current pricing levels for pensioner buy-ins
� Challenges for full buy-outs
� Opportunities arising from the Brexit vote
� Understanding your scheme’s longevity risk
LCP PENSIONS DE-RISKING UPDATE SEPTEMBER 2016
2016 gaining momentum after a slow start to the year
Welcome to LCP’s review of the latest developments in the buy-in, buy-out and longevity swap market ON-DEMAND WEBINAR
De-risking your small scheme using buy-ins or buy-out
Volume of buy-ins and buy-outs since 2007 split by half year
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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
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H1 H2
Volume of buy-ins and buy-outs since 2007 split by half year
Back-book volumes
View it here
Cementing our leading position with industry awardsLCP has won the De-risking Consultant of the Year for the 5th time in six years at the Financial Times Pension Awards this year.
The award is the second win this year for LCP’s de-risking practice, which was named Risk Reduction Adviser of the Year at the UK Pensions Awards (May 5) for the
third consecutive year. Read about it
Competitive pricing available for pensioner buy-ins and the impact from the EU referendum.
Attractive pricing available for pensioner buy-ins
The new capital reserving regime under Solvency II has not dampened enthusiasm for pensioner buy-ins with six or seven insurers actively competing on recent transactions. This competition is leading to pricing materially below a gilts-based valuation reserve for some schemes (see box below on the LCP Visualise insurer price tracker).
Challenges for full buy-outs
Full buy-outs have been limited to smaller schemes so far in 2016 as insurers got to grips with how the new capital rules impact deferred pensioner pricing. Schemes have also had to battle with falling yields in the wake of the EU referendum vote. Whilst the fallout from the vote opened up attractive pensioner buy-in pricing opportunities for schemes that could move quickly (see ICI brexit-driven opportunity below) it has reduced affordability for full buy-out for all but the best hedged schemes.
ICI Fund seizes Brexit-driven opportunity
The EU referendum vote opened up opportunities for schemes that could move quickly. In particular, insurers were able to put forward improved buy-in
pricing as credit spreads spiked in the wake of the vote, allowing insurers to purchase investments at lower cost and pass this saving onto the scheme in their pricing.
We helped the ICI Fund seize this opportunity completing a £750m buy-in with L&G transacted in record time for a transaction of this scale – just eight working days after the vote. We estimate that moving quickly saved £10m on the price, bringing it within the Trustee’s target metrics.
The ICI Fund was able to move quickly thanks to having the necessary governance in place and an innovative umbrella contract structure. This allows the Fund to do follow on buy-ins under the existing legal documents from previous buy-ins. This is their ninth transaction under this structure.
Since the EU referendum vote we have helped two other clients complete buy-ins of over £100m
You can read more about the transaction in our press
release or watch the video here.
LCP Visualise’s online insurer price tracker is based on direct pricing feeds
from key insurers in the market. For a typical scheme pensioner buy-in
pricing has improved over 2016 and the best pricing is typically close or
better than a “gilts-flat” valuation reserve.
LCP Visualise helps pension plan trustees
and sponsors identify when to approach
the market, based on indicative pricing
sourced directly from the insurers in the
market.
To access visit: lcpvisualise.com
LCP Pensions de-risking update September 2016 2
A total of £2.7bn of pension buy-ins and buy-outs
were completed by UK pension plans in the first half
of 2016 marking a slower start to 2016 than in recent
years (H1 2015: £4.4bn).
The main driver of the slower start was that last
year pension schemes brought forward transactions
ahead of the introduction of Solvency II in 2016.
While this meant a record £5.4bn of volumes in
Q4 2015, it also accounts for reduced volumes for
H1 2016 compared to 2014 and 2015. However, the
underlying picture is one of a high-level of activity
and strong price competition.
Our analysis reveals:
� The first half of 2016 was dominated by Legal
& General and Pension Insurance Corporation
(PIC), as well as Scottish Widows who joined the
market late last year. Together these three insurers
accounted for £2.4bn of the £2.6bn of business.
L&G wrote a further £750m buy-in in July with the
ICI Pension Fund.
� There have not been any bumper £1bn plus buy-in
or buy-out transactions in 2016 so far. However,
there has in the first half of 2016, continued to
be a steady flow of mid-sized deals with five
transactions between £100m and £1,000m
compared to six in H1 2014 and seven in H1 2015.
� L&G and Rothesay Life wrote material “back-book”
transactions with insurer Aegon in H1 2016 to
acquire Aegon’s legacy UK annuity book (£6bn was
acquired by Rothesay Life and £3bn by Legal &
General). This means that across buy-ins, buy-outs
and back-book transactions, nearly £12bn of insurer
capacity has been deployed so far in 2016.
� The past six months has seen changes to the
insurers participating in the buy-in and buy-out
market. Just Retirement and Partnership merged
on 4 April 2016 and Prudential confirmed in their
half year results on 10 August 2016 that they have
withdrawn from the market, citing the capital
requirements under Solvency II.
Looking ahead to the rest of the year, there is
considerable appetite for buy-ins and buy-outs from
the seven insurers in the market, which is offering
attractive opportunities for pension schemes. We
expect buy-in and buy-out volumes for the second
half of the year to materially exceed those in the first
half.
LCP has continued our success in helping clients
successfully de-risk, being lead adviser on four of the
six buy-ins and buy-outs over £100m in the first half
of 2016.
Buy-in / buy-out volumes in the UK (£m)
H1
2016
2016
share
H1
2015
H2
2015
Total
2015
2015
share
Aviva 71 2.7% 407 577 984 8.0%
Canada Life 35 1.3% n/a1 32 32 0.3%
JPR Group 1382 5.2% 322 910 1,233 10.1%
Legal & General 6413 24.0% 1,145 831 1,977 16.1%
PIC 897 33.6% 681 3,131 3,811 31.0%
Prudential 0 0.0% 1,174 341 1,515 12.3%
Rothesay Life4 0 0.0% 675 1,663 2,338 19.0%
Scottish Widows 885 33.2% n/a1 394 394 3.2%
TOTAL 2,667 100% 4,405 7,897 12,284 100%
Source: Insurance company data. Transactions by UK pension plans only. 1 Canada Life and Scottish Widows entered the buy-in and buy-out market in the second half of 2015 so have no business in H1 2015.2 Just Retirement and Partnership merged on 4 April 2016 to form the JRP Group. The full H1 results for JRP are due to be released on 12 September 2016. Therefore the H1 2016 data for JRP does not include Q2 2016 data, except for a £95m buy-in with Galliford Try which was announced in June 2016.3 Legal & General’s H1 2016 data excludes the £3bn transfer of annuities from Aegon to L&G in May 2016 and the $65m bulk annuity in the US market.4 Rothesay Life’s data covers all publicly announced transactions with UK pension plans. The data excludes the £6bn transfer of annuities from Aegon to Rothesay Life in April 2016 and the £1.3bn transfer of annuities from Zurich to Rothesay Life in 2015.
2016 sees slower start, creating opportunities for the second half of the year.
LCP Pensions de-risking update September 2016 4
Our latest blog on de-riskingBlog - The LCP View
Do you know how much longevity risk your pension scheme is running?
Learn more
Do you understand your longevity risk?
It is hard to escape references to longevity risk at the moment. Last year saw over £20bn of longevity risk transferred by pension schemes through longevity swaps, buy-ins and buy-outs. And the Pensions Regulator is increasing its focus on ensuring pension schemes carry out complete and robust assessments of their risks, including an explicit reference to longevity risk in its guidance on Integrated Risk Management.
In our experience, pension schemes have traditionally found it hard to quantify their longevity risk in as
sophisticated a way as they do their investment risks. For that reason, we have developed LCP LifeAnalytics to help schemes measure their longevity risk in a more robust and bespoke way, enabling them to make better informed decisions about the timing of any longevity hedging compared to other investment decisions.
Our new and interactive LCP LifeAnalytics website helps you explore how and why longevity risk varies across
different schemes, to give you some insights into the main drivers. You can take a look here.
By answering three simple questions, you can get an overview of how longevity risk might look in your scheme, taking account of factors such as the scheme's maturity and level of de-risking already undertaken, and the options you might want to consider in due course to hedge it.
How to gain insight into your scheme's longevity risk
How understanding longevity risk leads to better investment decisionsLCP Investment Partner Ian Mills discusses why it’s really hard to give good investment
advice without understanding longevity risk.
Continue reading this blogIan Mills
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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 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.
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Clive Wellsteed
Partner & Head of [email protected]
LCP has led nearly 50% of all buy-ins and buy-outs over £100m over the past 3 years*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 advised 12 of 21 in 2014, and 6 of 18 in 2015, and 4 of 6 in H1 2016.
+44 (0)20 7432 6644
Charlie Finch
Myles [email protected]
2011, 2012, 2013, 2015 & 2016
LCP De-risking AdviserBuy-ins, buy-outs and longevity swaps
WINNER2016
Risk Reduction Adviserof the Year