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Decommissioning of pensions liabilities. A career in ascent. JAY SHAH CLIVE WELLSTEED 12 TH FEBRUARY 2013. Scheme Closures. CLOSED TO NEW MEMBERS. OPEN. CLOSED TO FUTURE ACCRUALS. WINDING UP. *figures from PPF 7800 index. Fragmentation and Inefficiency. Admin Expenses.

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Decommissioning of pensions liabilities

Decommissioning of pensions liabilities

A career in ascent




Scheme closures
Scheme Closures





*figures from PPF 7800 index

Fragmentation and inefficiency
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

2011 financial volatility
2011 – Financial volatility

100bps change in yields =15-25% change in liabilities

145bps fall

52bps fall

93bps fall. Negative real rates

5.6% fall

2011 schemes battered
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


Managing risk efficiently
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






Capital markets


LDI provider

Fiduciary manager

Yield generation

Eiopa proposals may result in pension schemes thinking about risk differently in future
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


Additional capital requirements

Minimum Capital Requirement


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

What might be the impact of eiopa s proposals for db pension schemes
What might be the impact risk differently in future…..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?

Nuclear decommissioning solutions
Nuclear Decommissioning – Solutions? risk differently in future…..

Pension scheme decommissioning
Pension scheme decommissioning risk differently in future…..

Similar situation to nuclear decommissioning in the UK actuarial pensions market

Actuary qualifying now, retiring at 65

The pension assurance actuary skill set
The Pension Assurance actuary – skill set risk differently in future…..

  • 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

The pension insurance market
The pension insurance market risk differently in future…..

UK pension risk transfer transacted since 2004

Source: PC analysis, LCP buyout report 2010, Hymans Robertson buyout report 2009, 2010 and 2011

Bulk annuity insurers
Bulk annuity insurers risk differently in future…..

Market share Q2 2008 – Q1 2012 Total £20.3bn


Source: Hymans Robertson buyout report

* Others referrs to Paternoster, Aegon and AIG

Case study
Case study risk differently in future…..



2012 retirees

2013 retirees

2014 retirees

£158m insured upfront

Annual tranches

Decommissioning journey plan

Putting together a business case for a buy in or buy out
Putting together a business case for a buy-in or buy-out risk differently in future…..

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

Expanding the journey plan to include buy out
Expanding the journey plan to include buy-out risk differently in future…..

A five stage process for a buy in or buy out

Six risk differently in future…..months??

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

Governance framework
Governance framework risk differently in future…..

  • 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



Minimising asset risk during premium payment
Minimising asset risk during premium payment risk differently in future…..

Assets in scheme


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


The legal contract
The legal contract risk differently in future…..

  • 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...


QUESTIONS? risk differently in future…..