Decommissioning of pensions liabilities

1. Decommissioning of pensions liabilities A career in ascent JAY SHAH CLIVE WELLSTEED 12TH FEBRUARY 2013

2. Scheme Closures CLOSED TO NEW MEMBERS OPEN CLOSED TO FUTURE ACCRUALS WINDING UP *figures from PPF 7800 index

3. Fragmentation and Inefficiency • Admin Expenses • Investment Expenses as % of PV Scheme Liabilities • Other Expenses as % of Total liability (examples)* • £2bn scheme: <5% of total liability • £200m scheme: 7% of total liability • £20m scheme: 15% of total liability ~6% (411/6432) of schemes hold 75% of the liabilities Median scheme: ~400 members, £31m

4. 2011 – Financial volatility 100bps change in yields =15-25% change in liabilities 145bps fall 52bps fall 93bps fall. Negative real rates 5.6% fall

5. 2011 – Schemes battered • Commentary: • Typical scheme: Deferreds and pensioners: Say £100m buyout cost • Assets (£70m): 55% (£38.5m) equities, 20% (£14m) corporate bonds, 25% (£17.5m) gilts • Start funding level: 70% • End funding level: 61% Funding to buyout 61%

6. Managing risk efficiently Access to specialist risk takers • Company • Wants stable contributions • Acceptable risk • Trustee • Set strategy • or • Sense-test strategy? Risk pooling • Company appetite for level and timing of cash contributions will influence which route is favoured Reinsurers Company Trustee Insurers OR Capital markets OR LDI provider Fiduciary manager Yield generation

7. EIOPA proposals may result in pension schemes thinking about risk differently in future….. The SCR is the capital required to be 99.5% confident of not having assets less than liabilities one year from now Solvency Capital Requirement Value of sponsor covenant / PPF SCR Additional capital requirements Minimum Capital Requirement MCR Value of contingent assets Risk margin Market value of pension scheme assets Best estimate Technical Provisions Best estimate Value placed on assets and covenant Value of pension scheme liabilities

8. What might be the impact of EIOPA’s proposals for DB pension schemes? Even with a long transition period, implications of EIOPA’s proposals include: • How trustees and companies set Technical Provisions • EG Target buy-out reserving, or even higher, in 15 years Options for Technical Provisions discount rates currently available to EIOPA • Allow current differing practices to continue across member states • Push for change to the Directive to make clear that a risk-free discount rate should be used • A “two-tier” approach • Investment • Contingent assets / covenant • Substantial increase in reporting, disclosure and governance requirements Increased interest in buy-in and buyout?

9. Nuclear Decommissioning – Solutions?

10. Pension scheme decommissioning Similar situation to nuclear decommissioning in the UK actuarial pensions market Actuary qualifying now, retiring at 65

11. The Pension Assurance actuary – skill set • Asset Liability Management • Thinking in risk and probabilistic terms • Deep technical understanding • Wider understanding of different environments and commercial awareness • Most of all you must love pensions

12. The pension insurance market UK pension risk transfer transacted since 2004 Source: PC analysis, LCP buyout report 2010, Hymans Robertson buyout report 2009, 2010 and 2011

13. Bulk annuity insurers Market share Q2 2008 – Q1 2012 Total £20.3bn Others* Source: Hymans Robertson buyout report * Others referrs to Paternoster, Aegon and AIG

14. Case study 2011 Pensioners 2012 retirees 2013 retirees 2014 retirees £158m insured upfront Annual tranches Decommissioning journey plan

15. Putting together a business case for a buy-in or buy-out Removes or reduces pension risk • Cash contributions • Accounting volatility • Running costs (including PPF levies) • Journey plan / glide-path What are the other benefits? • Management time • More flexibility for future corporate activity • Removes future regulatory risk Is the price to de-risk • Affordable? • Value-for-money? • Asset prices against annuity prices Be ready to counter opposing views “In their haste to get rid of pension funds, companies are in danger of paying through the nose to remove risks that may not even exist or, if they do, are pretty small.”  Anthony Hilton, Evening Standard, 8 June 2011

16. Expanding the journey plan to include buy-out

17. Sixmonths?? A five stage process for a buy-in or buy-out Assess feasibility Source accurate quotations Agree key commercial terms with shortlisted insurers Finalise legal contract Post execution

18. Governance framework • Governance structure • Appropriate trustee and corporate representation • What is working party’s remit and objectives? • Will it make decision or recommendations? • Who does the working party report to? • Establish broad agreement on an acceptable price / additional cash requirements • Agree key milestones and overall project timeline Working Party Trustees Company

19. Minimising asset risk during premium payment Assets in scheme Insurer Key risks to manage • Out-of-market exposure • Market illiquidity • Pooled fund issues – notification and settlement periods In-specie transfer Sell for cash Cash to insurer Cash

20. The legal contract • There are plenty of areas where actuaries can add value to the legal process: • Documenting the premium agreed with the insurer • Mechanics for how and when to pay the premium • How assets in specie will be valued • Some of the Trustee warranties e.g. completeness and accuracy of the data • Data cleansing process – correcting the data • Re-calculation of the premium using the corrected data • Option factors • Potential benefit restructuring and the financial terms to apply • Other future proofing eg administration transfer, buy-out, PPF, winding up • ... and lots more...

21. QUESTIONS?