The panel discusses bulk annuities.
Emma Watkins: Although a handful of ‘all risk’ transactions have occurred over the last few years, they tend to be related to exceptional circumstances where speed is of the essence, for example, in mergers and acquisitions.
Generally, trustees understand the time and cost benefits of good preparation, including the work required to cleanse member data.
Collection of additional data such as marital status and spouses’ dates of birth can also help shape the assumptions the insurer might otherwise use in its premium calculations.
Minimising the need for insurers to charge risk premiums or hold additional capital for uncertainty relating to data and benefits should ensure trustees get best value when securing members’ benefits.
Greg Wenzerul: ‘All risks’ bulk annuity transactions such as buyouts and buy-ins have been the cornerstone of the de-risking market for many years now.
In our experience, these ‘all risk’ transactions remain the preferred de-risking solution where the current situation of the scheme in question allows, as all the main risks are removed in respect of the underlying insured population, including longevity, investment and inflation.
Additionally, the insurance contract provides an exact match for these liabilities.
Recent changes to these transactions include complex adjustments to allow a data cleanse to take place on the insured population, and some insurers are allowing for future data adjustments to incorporate future pension increase exchange exercises.
For schemes that are not quite able to afford these conventional solutions, we are seeing increased demand for bespoke transactions that allow the trustees more time to pay the premium, such as Prudential’s Future Premium Product solution.
This allows payment of the premium to be deferred for up to 15 years. These alternative solutions have emerged over the last few years and allow some elements of risk to be retained by schemes.
We hear it is now possible to secure CPI benefits with an insurer. Is this true, and if so is the pricing competitive?
Sammy Cooper-Smith: It is possible to purchase CPI benefits with an insurer. However, the market for hedging CPI risk is neither deep nor liquid, and so the cost of insuring CPI benefits is currently unattractive.
In our experience, in the short term it is more likely that trustees will want the flexibility to switch to CPI at a later date written into the policy rather than actually securing CPI benefits today.
Charles Cowling: All insurers have been willing to offer the option of securing CPI increases either in deferment or in payment for some time.
In cases where the index of reference for future increases is unclear, they are also willing to allow for any uncertainty in the contract so that the index can be amended later on and, if relevant, any profit passed back to the pension scheme.
At this stage it is still unclear whether the insurers can offer any savings from writing CPI business, as a liquid marked for CPI-linked investment has only just started to develop.
Some insurers have indicated they may offer a small reduction in price in the expectation of future gains from a switch to CPI-linked investments.
However, the size of these savings is hard to assess.
Tom Ground: Some insurers are now quoting on CPI benefits on selected cases rather than across the board.
There is still no liquid market in CPI assets and so the insurer is in the most part, matching the CPI risk with RPI assets.
This is most likely to be acceptable in cases where CPI has tight caps and collars for example CPI 2.5%, as the insurer can base the pricing and the asset strategy on something more akin to a fixed escalation basis so the CPI increases can be accommodated. Such an approach is not cost-effective if the caps and collars are wide.
The expected reduction in the cost for CPI compared to RPI will not be fully reflected in insurers pricing as there is uncertainty around potential future changes which could bring CPI and RPI closer together.
It is unlikely that the full cost reduction for CPI versus RPI will be available until there is a liquid market in CPI assets.
Emma Watkins: We have been calling on the government to actively generate a CPI swap market through the issuance of CPI-linked gilts.
Although it is possible to secure CPI benefits with MetLife Assurance, this is dependent on the liabilities being sufficiently large to purchase available CPI-linked protection.
In addition, due to the current lack of liquidity, the cost of securing benefits on a CPI basis is likely to be closer to the RPI basis than recent differences between the two indices might suggest.
Rather than securing CPI linked benefits today, obtaining a commitment from the insurer to permit the surrender of RPI benefits and purchase of CPI benefits at a future date and reflecting market conditions at the time of exchange is a more practical approach.
Greg Wenzerul: Over the last 12 months we have prepared our administration, operational and pricing teams to make sure we are as well prepared as possible.
CPI benefits can be secured, although the shortage of suitable assets to back the transaction makes pricing more complicated.
We anticipate that the pricing will become increasingly competitive over the next few years, when a greater supply of CPI-linked assets becomes available.
