Buyout - Maximizing Security and Flexibility for Pension Schemes

1. Buyout – why all the fuss?Margaret Snowdon. Lucida plc17th July 2008

2. Buy out is the transfer of liabilities to an insurer in exchange for a premium made up of assets and/or cash. • It can take the form of: • Buy out • Full, partial or phased • Buy in • Full, partial or phased • Market this year is expected to be £10 – 15 billion

3. The changing face of buyout • Buyout is not new • But it has changed • New entrants have emerged rapidly • The range of solutions has expanded • Buy-out now takes many forms • And new solutions emerging

4. Buyout – trustee top 10 questions

5. How does buy out work? • Why is buy out expensive? • How long will the new players be around? • Are members’ rights and security protected? • What happens if things go wrong? • What service will members receive? • Will the scheme need to wind up? • Can we get rid of the risks immediately? • What risks will be left behind? • Is buy out inevitable?

6. Drivers for buyout

7. What does everyone want? • Members • Security of their pension • Trustees • Reassurance that promises can be met • Seen to be doing the right thing • Goalposts that do not move • Company • Clarity of costs • Predictability • Flexibility in funding • Control of their business

8. Why are so many companies looking at buyout? • Demands on trustees • Risks: • Investment • Inflation • Longevity • Operational • Data • Regulatory • Volatility • Credit • Expenses • Focus on business • Market and publicity • Problems need to be solved • Deals being done

9. The shape of buy out • Traditional • Clean break • Partial (not actually buy in) • Structured buyout • Insured solutions (buy-in) • Structured solutions • Longevity derivatives • Non-insured solutions? • You name it – you’ve got it?

10. Ultimate de-risking • Price/terms lock-in • Liability management • Data indemnity • GMP equalisation • Wind up management • Communications • Something for everyone?…..

11. Buy-Out Higher • Insurer takes on all the liabilities and risks including longevity, interest rate and investment risk in exchange for a single premium (scheme assets plus any top up required to reach the buy-out price). • Insurer assumes responsibility for all future pension payments and administration. • Trust wound up and trustees achieve full statutory discharge. • Company has no ongoing liability • No further exposure to volatility in market movements, changes in longevity expectations or changes in accounting standards and funding legislation • PPF levy exposure eliminated • Ongoing pension funding obligations removed • Stakeholders get transparency and certainty. Full Buy-out Partial Buy-out Potential Premium to Quoted Liability Payments toward full buy-out Structured Buy-out Initial Payment Lower Limited Complete Risk Transfer

12. Partial Buy-Out Example of partial buy-out subset premiums* • Partial buy-out of a subset of the scheme liabilities. For example the subset could be based on age, on status (in-payment vs. deferred vs. active) or on benefits (level benefits vs. inflation linked or escalating benefits). • Eliminates the scheme’s exposure to particular subsets and reduces the aggregate exposure of the scheme. • Enables the scheme to undertake further partial transfers in the future or develop a full buy-out solution for the residual exposure. • Different subsets may also have buy-out premiums which differ significantly (e.g. deferred vs. pensioners). For example, for a selected scheme the overall buy-out premium might be 20% higher than the accounting liability, but the buy-out premium for pensioners might only be 10% higher than the quoted liability. +10% +20% +30% +30% • pricing will vary greatly from scheme to scheme. We would work with you to price the optimal subsets based on your objectives scheme information. Different legal structures may be required for active members.

13. Insured Solutions(buy in) • Derisking benefits are easily understood and quickly implemented = popular • For selected populations, following risks are transferred to the insurer: • Longevity • Investment • Inflation • The insurance policy is • held as an asset of the scheme in trustees’ name or assigned to members. • valued at an amount equal to the liabilities and therefore removes further volatility • covered under the Financial Services Compensation Scheme. • Company retains primary responsibility for the scheme • With a “buy-in”, the insurance asset can benefit all members equally in the event of wind-up • It can be structured to include a transfer of the scheme administration

14. Pensioner solutions “Buy in” of the pensioner liability as part of a wider risk management solution Buyout liabilities Residual buyout liabilities Equities Equities £m Bonds Bonds Insurance policies Pensioner liabilities Before After

15. Structured Buy-Out/Buy-In Like a traditional buy-out but with the premium structured as a series of payments. Risk transfer on day one. Investment Income with Scheme Traditional buyout premium Assets remaining with Scheme Assets remaining with Scheme £m Interest Payment Regular Premium Investment Income less Interest Payment Initial Premium Initial Premium Traditional Buy Out Day One Structured Payment Premiums and Interest Payments Remains with Scheme

16. You think buy out is expensive?

17. Visible Administration and trusteeship Governance and controls Systems Legal Actuarial Investment and custodian Staff/property Shared services Hidden Management Knowledge Reputation Data Mistakes Opportunity The real cost of running a pension scheme?

18. And if that wasn’t bad enough….Regulatory pressures • ASB discussion paper on changing the discount rate to a risk free measure • Discount based on gilts rather than corporate bonds • Forces schemes to allow for credit risk exposure • Reduced discount rates will increase the liabilities • TPR proposal to move schemes to PA92 long cohort table with an underpin • Less than 1% of schemes use this measure • 55% of schemes use the more optimistic “medium cohort” or worse • Long cohort adds 2 years to male life expectancy • Equates to around 7% additional liabilities • Higher PPF levy costs for “risky investments”

19. What else do you need to know?

20. Current market • The players – selection is key • Pricing • Supply and demand • Competition • Procurement • Data and information • Value add • Process • Quotation pipeline • Capital and the credit crunch • 2008 and beyond

21. Summary • Buy out is not new • Buy out reduces risk • Risk reduction is the business of the buy out companies • Buy-out can eliminate your pension risks • Cost savings on administration • Benefit from innovation • Lose the legacy • Understand the risks you face • Structure your deal to avoid collateral risks like reputation and data • Buy out adds value • Today the price of buy-out is probably as low as it will go • Tomorrow scheme funding rates may start to increase • DB schemes are costly and complex • Holistic liability management • What is the price of peace of mind? • Plan your buy-out and buy-out your plan

22. Questions?margaret.snowdon@lucidaplc.com Lucida plc is authorised and regulated by the Financial Services Authority. Nothing in this document should be considered as an offer made by Lucida plc. This presentation should not be considered as ‘investment advice’.