Savings of 10% or more could be secured by trustees of defined benefit (DB) schemes when they de-risk, due to the introduction of health and lifestyle techniques in the bulk purchase annuity (BPA) market, a report says.
The findings, which have been published by the Pensions Institute, coincide with what is believed to be the first 'enhanced' buy-in transactions, conducted by Partnership Assurance in December 2012, in a market that experts believe could be worth up to £380bn.
According to the report which uses the completed deals as case studies, individual underwriting makes possible de-risking transactions that previously had been unaffordable, taking schemes closer to a fully funded position and to a final buy-out.
"This is a major development in the de-risking market," said Dr Debbie Harrison, co-author of the Pensions Institute's report.
She added: "Trustees and schemes sponsors depend on securing affordable buy-ins in order to reach their ultimate goal, which is to transfer all liabilities to insurance companies. The introduction of medically-underwritten buy-ins will help them to reach this goal more quickly- a development that should be welcomed by stakeholders and regulators alike."
At the unveiling of the report at Cass Business School, Dr Harrison said that the current focus for enhanced bulk buy-ins is smaller schemes with up to 400 pensioners.
Based on data in the Pensions Regulator and Pension Protection Fund's Purple Book 2012, there are more than 5,000 schemes in this market, representing about 350,000 pensioners and £40bn assets under management.
"Buy-ins are already a common tool for trustees looking to de-risk their DB schemes. In the same way that enhanced annuities have changes the decumulation landscape for DC pensioners through the Open Market Option, the enhanced buy-in offers DB trustees a more cost effective way to de-risk" said Martyn Phillips, JLT Pensions Capital Strategies director and head of buyouts.
He continued: "With an ever increasing pressure on costs driven by widening scheme deficits, it is important that trustees are aware of, and explore available options."
Due to the complexity of the market, the report also recommends that a clear regulatory framework and a code of practice needs to be established, and that there needs to be consistent and reliable data for the de-risking market as a whole and the development of consistent data in the enhanced buy-in market.
"We believe the proposal for industry and regulators to establish a code of practice is a welcome and significant initiative. This provides a clear framework for how schemes and their advisers consider the benefits of individual underwriting when evaluating the most effective way to insure liabilities," said Will Hale, director of corporate partnerships at Partnerships.
First published 04.02.2013
monique_simpson@wilmington.co.uk
