workshop on investment opportunities in insurance-linked securities returns from pension buy-outs...
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Workshop on Investment Opportunities in Insurance-Linked
Securities
Returns from Pension Buy-outs
Jonathan BloomerImperial College
Business School
2
3
Risk Management – Customised Solution
• Traditional buy-out
• Partial buy-out– Subset could be based on age, status or benefits
• Structured buy-out
• Insured solutions
• Longevity derivative solutions
• Risk management programme including liability management
Complete
Lower
Limited
Higher
Risk Transfer
FullBuy-out
Potential Premium to Quoted Liability
Structured Buy-outInitial
Payment
Pay
me
nts
tow
ard
full b
uy
-ou
t
Partial Buy-out
A range of pension de-risking strategies is available that can be customised to meet individual corporate requirements
4
Pensioner Buy-in SolutionsInsurance for the pensioner liability as part of a wider risk management solution
Buyout liabilities
Equities
Bonds
£m
Before After
Insurancepolicies
Bonds
Equities
Pensioner liabilities
Residual buyout
liabilities
5
Drivers of the Pension Buy-out Market
Company Directors
Definedbenefit
pension plan
Pension fundtrustees
Pensionsregulator
Deficit volatility
Improving longevity
Increasing disclosureobligations
Securing pension Promises “safe haven”
Sponsor covenant
Pensionprotection
fund
Employee/union pressures
6
Market Scale and Liability Growth
Liabilities
Liabilities at start of year
Liabilities discharged through PPF
Liabilities discharged through bulk buy-out market
Benefits paid
Interest on liabilities
Benefits Accrued
(£ billions)
800
(2)
(10)
(20)
40
20
Liabilities at end of year 828
Source: Punter Southall “The End Game?”
7
Market Development
Estimated 8bn in 2008
£m
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2007Q1
2007Q2
2007Q3
2007Q4
2008Q1
2008Q2
2008Q3
2008Q4*
8
• Spread – cost of liabilities vs. return on assets
• Risks– Longevity
– Interest rates
– Credit
– Inflation
– Operational
Economic Model
9
Liabilities Cannot Accelerate, but Longevity Risk.
Sample Pension Scheme - Cashflows (nominal terms)
0
10
20
30
40
50
60
70
80
0 5 10 15 20 25 30 35 40 45
Year
Ben
efit
pay
men
ts (
£m's
)
10
• Spread – cost of liabilities vs. return on assets
• Risks– Longevity
– Interest rates
– Credit
– Inflation
– Operational
Economic Model
11
FSA Capital Requirements
“Pillar I” “Pillar II”
Basic requirement (“rules-based”)
The FSA requires a minimum level of capital on top of prudent reserves equal to
4% of reserves
plus
resilience capital based on the underlying assets
Economic requirement (“1/200”)
The FSA requires realistic economic capital to be held that will ensure solvency on a realistic basis with 99.5% certainty.
12
Return on Equity = Return on Assets + 101 x (return on assets - pricing yield)
= 6.02% + 10 x (6% - 5.1%)
= 15% per annum
Simplified Equity Returns
1 If capital required to support the business is 10% of statutory liabilities, i.e. gearing is 10 x 2 Assumed at 100bps over swap rates
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• Trustee driven transactions
• Sponsor goals for longer-term
• Fewer players
• Price increases
Implications
Sustainable, Growing Market
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