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Survey Report

Interview with Lincoln Pensions

Chapter five of the 2020 de-risking report

Pensions Corporate Consulting|Pensions Risk Solutions
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By William Griffiths | January 20, 2020

In this interview, Will Griffiths talks to Adolfo Aponte about another busy year for Lincoln Pensions in the bulk annuity market and where Adolfo thinks insurer covenant advice can add real value.

Lincoln Pensions has been providing covenant advice to pension schemes for over a decade and, for the last eight years, it has been advising pension schemes on the financial robustness of insurers offering bulk annuities.

Q: How does Lincoln Pensions go about an insurer covenant review?

A:“Our focus is to ensure that trustees and sponsors can actively evaluate any trade-off between the price of an annuity policy and the level of security offered by the insurance provider, noting that the lowest price may not always equate to the strongest counterparty.

We achieve this by assessing an insurer’s capabilities across seven key factors, ranging from the robustness of the solvency position to the risk management and governance culture. This allows trustees to visualise an insurer’s risk profile. Our analysis is complemented by the ongoing dialogue we maintain with the insurers around their financial standing and broader strategy.”

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Overview of Lincoln Pensions

  • One of the largest covenant advisers in the general pensions market with a team of over 50 people
  • Over the last two years have advised on bulk annuities for over £16 billion of liabilities
  • A specialist team focused on identifying the risk profile of insurers active in the bulk annuity market
  • The team has a wide range of backgrounds including corporate financiers, accountants, actuaries, lawyers and former regulators

Q: What do you see as your key differentiators compared to others who provide similar services?

A: “Our approach seeks to help trustees (and sponsors) that are caught by the industry jargon; we want to enable them to examine an insurer’s risk profile in a way that can be clearly understood. Part of what we do involves presenting the results of our analysis graphically. This approach offers a consistent framework to compare the relative strength of several insurers in the brokering process – we believe we are the only adviser to do this.

We also focus very much on forward-looking advice, which is important given the annuity policies will be held for decades, and as a result cover topics such as the impact of new business on insurers, possible regulatory developments and how an insurer’s strategy might develop.”

Q: What would you say in response to the challenge that an insurer covenant review is not necessary given the regulatory environment for insurers?

A: “There is sometimes a misconception about what insurance is designed to offer – insurance is rightly viewed as the gold standard but the regime does not purport to be risk-free. As with all insurance products, each annuity policy will offer a trade-off between the premium paid and the level of protection received. The regulatory regime retains flexibility to enable investors in this sector to make a return on their capital and different insurers will go about achieving this in different ways. Understanding these differences is key.

Life insurance failures are very rare but any such cases tend to be high-profile and get meticulously scrutinised by regulators, politicians and the media. They can also cause unnecessary anxiety and concern among policyholders, trustees and sponsors. So good governance plays an important role and trustees will want to demonstrate that they have fully considered the trade-offs inherent between price and security.”

Q: At which stage are you typically brought into a process?

A: “Originally we used to be brought in at the later stages, almost as a tick-box exercise focusing just on the insurer the trustees had entered exclusivity with. More recently though we are asked to provide input in tandem with first-round bids; this enables trustees to compare bids on the basis of security, not only price, and also provides an opportunity for them to ask any outstanding questions of all the insurers before selecting one to grant exclusivity to. This is also the approach that will be offered under the Willis Towers Watson Streamlined Bulk Annuity Service.”

For most insurers, we are expecting solvency levels to remain robust going into 2020. Then, over the medium term, we expect the insurance industry to come under greater scrutiny given its rapid expansion.”

Adolfo Aponte
Lincoln Pensions

Q: What are your predictions for the bulk annuity market from a covenant perspective?

A:“For most insurers, we are expecting solvency levels to remain robust going into 2020. Then, over the medium term, we expect the insurance industry to come under greater scrutiny given its rapid expansion. In this context, it is also interesting to note that the current regulatory regime has not yet been tested through a full business cycle (it came into force in 2016). A pick-up in credit defaults, for example, could well hamper the industry’s capacity to continue to write new business at the levels we have seen over the last year, leaving schemes that have selected “buyout” as their end-game target waiting for the insurance industry to turn the page.”

Willis Towers Watson’s Streamlined Bulk Annuity Service

  • Brings together Willis Towers Watson, Burges Salmon and Lincoln Pensions to deliver transaction, legal and financial strength services at a competitive fixed fee
  • Makes transactions straightforward for trustees and insurers, generating good insurer engagement
  • We have used our combined market presence and bulk purchasing power to pre-negotiate terms which are better than insurer standard
  • Faster transaction times mean an extra opportunity to capture attractive insurer pricing
  • Has been used successfully on more than 20 bulk annuity transactions, with aggregate premiums of more than £1 billion

Next Chapter - Spotlight on: GMP equalisation – insurer views

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De-risking report 2020 - Soaring to great heights PDF 3 MB
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