Lucida PLC

Challenges of a new world. Professional Pensions Bulk Annuity Q&A September 2008

Oct 01 2008

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1. With unprecedented interest in the buyout market some insurers are beginning to struggle with the level of quotation requests and insurers are becoming more selective in providing quotations. How can schemes help ensure you prioritise their quotation requests? Should schemes seek indicative prices rather than full guaranteed quotes?

Lucida: In order to compete, schemes need to make themselves more attractive and there is a number of ways to do this:

• A real deal is more attractive than a speculative one, regardless of size. Indicative quotes come low down the pecking order. In such a case, the scheme would be better off by selecting a single provider to work with to establish interest and to discuss solutions, rather than approach the market on a full tender without fully understanding what solution(s) may work for them. The Scheme Actuary probably has enough information to be able to provide a rule of thumb price with which to assess basic affordability.
• Anonymous requests are very unappealing. They imply a lack of serious intent. Most providers will be willing to sign a non-disclosure agreement, although leaks to the press in a small number of cases in the past have not helped instil confidence in buy-out providers. · Poor or restricted data is a turn-off. Trustees and companies who are seriously interested in buying-out scheme risks should prepare the scheme and member information as early in the process as possible. This is good practice in any event and is a useful task to set your administrator before you start thinking about buyout. The better the data, the more accurate the quote.
• Asking for quotes in an unrealistically short timescale is unhelpful. The current turnaround time is around six weeks. It is extremely disappointing to be asked to produce a quote in a very short period, only to discover that the company and/or trustees will not actually discuss the proposals for several weeks.
• Asking for quotes from the whole market implies that the seller does not know what he wants or on what basis he will select the provider. In the current market (and, I would argue, at all other times too) sellers should set out their objectives clearly and only approach a short list of companies who can meet all those objectives. In many instances, the final solution will result in an ongoing relationship between the supplier and the company. Understanding the pressures on both sides of the relationship and treating each party respectfully will support a healthy ongoing relationship.

2. These are difficult times for investment markets which is presenting new challenges for pension buyouts. For example the inflation swaps market has become extremely illiquid such that even relatively small buyouts can move the market. How are you addressing these challenges? Is there an impact on your pricing?

Lucida: The scheme’s asset mix will impact on the cost and timing of transitioning to the type of investment structure an insurance company is able to hold (an insurance company is more restricted in this regard than the trustees). Illiquid assets can cause problems. The biggest issue, however, is the trustees’ expectation that most of the assets can be traded, especially when they are able to get prices from their investment adviser. Quite often the reality is that the asset is not tradable. Trustees considering a buyout would be best to discuss the transition strategy with the insurance company as early as possible and not simply wait until the deal is complete before providing a detailed listing of the assets.

3. We have recently seen the first consolidation in the buyout market with the apparent takeover of Synesis Life's activities by Pensions Corporation. What are your views on this and what does it mean for the buyout market. Is it the start of further consolidation and could prices increase with less competition?

Lucida: We have said for some time that consolidation is likely and desirable. This is the start, but on its own the Synesis deal will probably have very limited impact on the market. Interest in insured solutions remains high and there is evidence that the combined effect of capital constraints and unprecedented demand are pushing up pricing. The interest shown by some insurers in syndicating deals reflects the pressure on capital and is likely to be a precursor of sector consolidation on a larger scale.

4. We have just seen Rothesay Life reinsure part of the liabilities taken on from the Rank Pension Plan with Prudential. Do you believe there will be an expansion of cross re-insurance between insurers with insurers specialising in specific areas of risk? What reassurances can be offered to trustees who might be concerned about this process?

Lucida: Reinsurance is common and allows an insurer with a limited appetite for a particular type of risk to lay it off to someone with a greater appetite. In most cases reinsurance is a sensible strategy, however, wholesale hand-off of a bought-out scheme to another provider is another matter and could raise questions over the insurer’s commitment to the business and perhaps highlight some interesting issues on pricing and profit-taking. If trustees are concerned about the future reinsurance of their business they should ask the providers about their strategy and intentions before they conclude a deal.

Margaret Snowdon is Operations Director at Lucida.

She can be contacted on 020 7647 1610 or at margaret.snowdon@lucidaplc.com