Consultant Pioneers Cheaper De-Risking Option
(January 15, 2014) — JLT Employee Benefits has pioneered an insurer comparison service for enhanced buy-ins, providing a more competitive pricing structure.
The pension industry’s first whole-of-market medically underwritten buy-in transaction was completed in December, insuring a £12 million tranche of the £60 million British Arab Commercial Bank pension fund.
This nascent de-risking option—which takes the health circumstances of a tranche of pensioners into account, based on doctors’ records, member questionnaires, and interviews with the members, and then calculates a more accurate buy-in price—started to take off in the UK in 2013, but this is the first time insurers have been invited to submit competitive bids.
JLT Employee Benefits developed the new process, which hires a third party—MorganAsh in this instance—to collect the medical information via a short medical questionnaire. The results of the questionnaire are then provided to all competing insurers with identical medical information to enable them to price the buy-in.
For the British Arab Commercial Bank deal, three of the possible four insurers operating in the space took part in the bidding process. Partnership, Just Retirement, and Aviva all submitted bids, while Legal & General declined to take part, citing a lack of resources, according to JLT’s buyout consultant David Barratt.
The £12 million British Arab Commercial Bank buy-in, achieved using Partnership, was between £2 million and £3 million cheaper than the most expensive insurer to bid.
“This new process for completing underwritten buy-in transactions is an important step for pension funds looking to de-risk in the most cost effective way,” said Barratt.
“We feel [this process] will revolutionise the medically underwritten buy-in market.”
The exercise took three months to complete—a relatively short amount of time for medical underwriting—and the fees from the third party used to collect the medical data, Morgan Ash, cost the pension fund “between £6,000 and £12,000”, according to Barratt.
At least two more whole-of-market medically underwritten buy-ins are currently being organised by JLT, Barratt confirmed, and he believed other employee benefit consultants were in the process of using the process too.
Partership’s director of corporate partnerships Will Hale, told aiCIO that Hymans Robertson, LCP, and KPMG were now adopting or at least supportive of the whole-of-market approach.
“A common approach to the collection of health and lifestyle information from members will ensure that pension funds wishing to de-risk through an underwritten exercise will now have a choice of insurers and can be confident of attaining a competitive price,” he said.
“Trustees of the British Arab Commercial Bank Pension Scheme have made an important step in de-risking their pension fund and the transaction represents a key landmark in the development of the underwritten bulk annuity market.“
De-risking experts have also predicted 2014 could be the year when longevity de-risking deals take off in earnest.
Legal & General announced two major longevity de-risking deals at the end of 2013. One saw separate longevity insurance arrangements for two BAE Systems pension scheme arrangements (The Royal Ordnance Pension Scheme and The Shipbuilding Industries Pension Scheme), covering a total of £1.7 billion of liabilities.
The second saw a further £3.2 billion of liabilities arrangement implemented by Legal & General for the BAE Systems 2000 Pension Plan.
Related Content: Is Medical Underwriting the Future for Pension Derisking? and What Are the Risks of Longevity Hedging?