The panel discusses bulk annuities.
Is it possible to annuitise scheme benefits even before active member accrual has ceased? What are the pros and cons of doing this?
Sammy Cooper-Smith: It is possible to buy in scheme benefits before active member accrual has ceased, and Rothesay Life has completed transactions incorporating this feature already.
This can be achieved in a number of ways. Generally, where schemes have secured active member accrual it had been completed by securing benefits accrued to date or to a date in the near future, potentially with the opportunity to scale up the benefits secured by the policy once future accrual has ceased.
The ability to secure the benefits accrued to date allows a company to significantly reduce asset and longevity risk while maintaining an element of compensation that can be utilised as an effective retention tool.
Charles Cowling: There is no obstacle in a scheme being able to insure its pensioner and/or deferred population, either through a buy-in or a buyout contract, even if the scheme still has active members.
The main advantage is that the overall risk in the scheme is reduced earlier, on terms that are presumably acceptable, rather than being left in the scheme to be secured later on uncertain terms.
A further upside could be that the sponsor may be more disposed towards keeping a smaller scheme open for longer.
A downside, compared to a deal for a scheme closed to further accrual, is that the remaining exposure will be more volatile in relative terms, although of course smaller in absolute terms.
Tom Ground: It is possible to insure benefits for current and deferred pensioners before accrual has ceased for active members.
Insuring the benefits for the active members prior to ceasing accrual could be possible but an insurer is very unlikely to be prepared to accept the salary change risk, and so the trustees would need to specify the actual benefits to be secured.
The insurer can amend the benefits at a later stage if required, but would need to understand and be comfortable with the potential scale of the changes and the timescale, prior to final data being available.
From the trustees’ point of view, if affordable it could be attractive to secure a buy-in for the whole scheme.
However, if the scale of the proposed future ‘true up’ is large it could be that this will have to be secured at the prevailing terms of the insurer, and the trustees may not be able to use a competitor quote to drive the best price.
Emma Watkins: It is possible to design a buy-in contract to match the estimated liabilities of the active members using assumptions for annual salary increases, service periods and so on.
This can then be periodically adjusted using a transparent basis for actual experience.
This allows trustees to transfer longevity and asset risks while maintaining control of the ongoing scheme.
Where future accrual is set to cease, it’s possible to estimate the deferred benefits for active members at a proposed closure date.
This allows trustees to transfer risk in advance of closure with the advantage of being able to hold the buy-in contract should benefits continue to accrue.
Individual policies can only be issued once benefits are finalised.
Greg Wenzerul: We believe it is extremely difficult to secure risks in the market where control lies with a third party, and therefore it would be very hard to envisage annuitising salary linked accrued benefits.
Clearly, there are many ways schemes with some active members can still de-risk accrued benefits related to non-active members through insured routes, and many may find solutions to take these liabilities off balance sheet.
