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Survey Report

Tips for a well-run process

Chapter four of the 2020 de-risking report

Pensions Corporate Consulting|Pensions Risk Solutions

By Suzanne Vaughan | January 20, 2020

In light of the record-breaking volume of liability secured with insurers in 2019 and the expectation that this demand will continue into 2020, schemes looking to bring transactions to market will need to work hard to stand out from the crowd as they compete for insurers’ limited resources. Suzanne Vaughan reflects on the key lessons of 2019 that schemes can leverage to ensure a well-run process.

In order to get the best deal with any purchase (be that a new home, new car or holiday market-stall trinket) it’s always beneficial to the purchaser when supply outweighs demand. 2019 saw a fundamental shift in bulk annuity market demand, with a record-breaking volume of transactions written: over £40 billion, three times larger than anything seen up until 2018 when the then record-breaking £24 billion was written. This uptick in demand was caused by improved scheme funding levels (from strong asset performance and lower-than-expected increases in life expectancy) at the same time as we saw some very attractive pricing from insurers. We believe this level of demand will continue into 2020 (at the time of writing, insurers are telling us they anticipate quoting on only one in every four cases), so schemes wishing to optimise pricing will need to ensure they stand out from the crowd

What are the key lessons we can take from 2019?

Get the basics right

When insurers decide which case to quote on, one of the key factors they consider is how likely they believe the deal is to trade. With this in mind a few simple steps are critically important:


provide clean and complete data, including collecting up-to-date marital information, both marital status and spouse’s date of birth. As well as demonstrating to the insurer that this is likely to be a more efficient transaction, it also removes any concern over aspects open to misinterpretation across different insurers, leading in turn to an uneven playing field.

Benefit Specification

Engage legal support early in the process so that the benefit specification (which summarises the member benefits to be secured) is accurate and complete at outset. This not only removes risk in the insurers’ eyes of something being uncovered later in the process that means the deal is no longer feasible but also provides a demonstration of the upfront investment by the scheme to the deal.

Aligned trustee and sponsor

demonstrating both trustee and sponsor commitment to the transaction gives the insurer confidence that both parties are aligned. Setting clear, joint objectives with appropriate governance in place and suitable delegated authority is critically important. In 75% of the projects we lead a joint working group is established. This is a great way to demonstrate this alignment, agree joint objectives and go/no-go criteria upfront.

While none of the above steps are new, they have become even more important in achieving a successful outcome in a world of greater competition from other schemes. What’s more, they can largely be completed well in advance of approaching the market, helping you grab any pricing opportunities.

Changing behaviour in light of the supply/demand shift

2019’s marked increase in demand caused several behavioural changes among insurers and those taking bulk annuity deals to market.

So what are the lessons we can learn for future processes and what are the potential pitfalls to avoid?

behavioural changes in light of the

Sharper focus on the “take to market” proposition – by this, I mean a greater investment in the structuring of the subset of membership and benefits to be placed in the market for quotation. Of course there’s a delicate balance to be struck here between appearing attractive to insurers and gaining maximum value and risk reduction for a scheme.

There’s a delicate balance to be struck between appearing attractive to insurers and gaining maximum value and risk reduction for a scheme.

In 2019 we saw top slicing (the term for securing a subset of pensioner members with the highest liability) fall out of favour with insurers, as they began to decline more of these cases and increase pricing because of the concentration of deals written to date. Instead those schemes looking to secure a subset of their membership as an overall scheme investment moved to other selection approaches, such as every “N”th member selection, with certain restrictions and parameters. In the selection of these subsets, we saw an increase in upfront insurer engagement, with specific consideration of the potential onward pricing implications for the insurer’s own reinsurance terms, in order to secure best pricing and maximise insurer engagement.

Target price set in advance – Setting a target price within which the scheme will transact at outset has some real advantages. First it helps ensure that all parties are aligned in their views and also provides robust testing on the feasibility of any transaction, before time and expense is incurred on the full process. We very much encourage the setting of a target, doing so (even without then explicitly sharing this with the insurer market) helps provide comfort that appropriate due diligence has been completed before formally launching to market and it can also provide confidence that the transaction price is at a competitive level even if not all market participants have quoted.

However, it is worth being mindful of the potential consequences should the agreed target be shared openly with insurers at the wrong time. Although creating a clear guideline to insurers is viewed very favourably, it does allow them insight into your affordability and value-for-money measures, which can be incredibly valuable in guiding their negotiation tactics at later stages of the process.

Flexibility in timing of execution– Flexibility on timescales can be a real advantage in a bulk annuity transaction. The example in
Figure 8 is taken from our work with a global financial company, where Willis Towers Watson’s Asset Liability Suite software was shared with the selected insurer, with a target price set for the transaction and contracts agreed in advance. This flexibility of timescale allowed the insurer time to optimise their pricing, in the knowledge the deal was theirs should they hit target price.

Figure 8. Monitoring market pricing using Willis Towers Warson’s Asset Liability Suire
Figure 8. Monitoring market pricing using Willis Towers Watson’s Asset Liability Suite

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Case Study: An investment management company, £350 million buy-in

Here our client was initially considering insuring a subset of the overall pensioner population but opted to secure the full pensioner population as pricing received was far better than anticipated. Working closely with the Trustee and Sponsor as well as actuarial, investment and administration advisers, we were able to respond quickly to the favourable market opportunity presented.

Efficiencies were gained in the transaction by jointly reflecting the upcoming investment review as part of the process, allowing a broader selection of assets to consider for transfer “in-specie” to the insurer, reducing associated transaction costs.

Comfort side letters were valuable at contracting as the Trustee wished acknowledgement of an aspect which the insurer was unable and unwilling to provide in their contract. However, a mutually agreeable position was reached with the use of a comfort side letter.

Reacting to opportune pricing – Throughout 2019, with some particularly favourable pricing, we saw several cases where the trustee and sponsor responded quickly, rethinking their plans for a partial pensioner buy-in, instead securing an increased proportion of pensioners or even a full buyout. Having a robust governance structure set up in the early stages of the project allows schemes to be fleet of foot and to lock in to particularly favourable conditions if they present themselves as part of the process. Here strong project management can prove incredibly valuable as actuarial, investment and administration advisers all need to work closely together to respond to the changing structure of the transaction.

Streamlined approach to smaller schemes – With a number of insurers focused on large deals, some smaller schemes find it difficult to obtain full market interest. One way we have seen this mitigated is by using a streamlined offering such as the Willis Towers Watson’s Streamlined Bulk Annuity Service and 2019 saw substantial growth in this area.

This service was designed to counter and mitigate the above challenge, enabling a number of schemes to access improved pricing as well as enhanced commercial terms via a standardised off-the-shelf process incorporating pre-negotiated legal contracts. More insurers quote as they understand the process and pricing is better as expenses are kept low for them.

Insurer desire for earlier exclusivity – Through 2019 we observed an increased desire on the part of some insurers for schemes to commit to working exclusively with a single insurer much earlier in the quotation process. Moving into earlier exclusivity makes it much more likely that the insurer will secure the transaction, rendering the deal more favourable for them. From the scheme’s perspective, the theory goes that if an insurer is certain of transacting assuming a certain pricing threshold is achieved, their asset and reinsurance teams will work hard to meet this target and so ultimately better pricing will be achieved than if a wider market competitive process had been run.

Some insurers will seek to encourage this behaviour by offering to quote only if a scheme is prepared to reduce the field of participating insurers. This risks reducing the competitive tension in the bulk annuity process and has to be carefully weighed up against the alternative approaches open to the scheme. Before making a decision schemes should consider several factors, such as the number of insurers likely to bid, pricing indications from that insurer and the extent to which non-pricing features offered by that insurer make it a particularly favourable counterparty to the scheme.

The right decision here varies case by case, but there’s a general point to be made about the benefit of being prepared, knowing your target price in advance and having access to strong market intelligence on current pricing levels achievable across the market.

Your scheme transaction

If you are considering bringing a transaction to market in the not-too-distant future, I would encourage you to get started today. Make sure the basics – data and legally reviewed benefit specifications – are nailed down and form a joint working group to align scheme and sponsor objectives. Reflect on the 2019 change in behaviours in light of the supply/demand shift, paying particular attention to your own take-to-market proposition and project plan. I am sure 2020 will prove to be yet another fascinating year in the de-risking arena and wish you all the best in ensuring yours is a case that stands out from the crowd.

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Suzanne Vaughan

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