H E A L T H W E A L T H C A R E E R

M E R C E R W E B I N A R

L O N G E V I T Y R I S K – A R EY O U R E A D Y T O H E D G E ?

26 APRIL 2016

Alan Baker Andrew Ward Suthan Rajagopalan

© MERCER 2016 1

A G E N D A

1. BACKGROUND 2. KEY CONSIDERATIONS

3. NEW WAYS TO MANAGE THERISK

4. NEXT STEPS ANDQUESTIONS

© MERCER 2016 2© MERCER 2016 2

BACKGROUND

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W H Y W O R R Y A B O U T L O N G E V I T Y R I S K

3

THE PROBLEM…Wealthy men living longer than averagewoman for first time

- The Guardian, October 2015

Longevity greater risk to pension schemesthan low interest rates

- Fitch Ratings, August 2015

Average life expectancy heading for 100- The Telegraph, January 2015

Britons to live up to four years longer than officialestimates by 2030

- The Telegraph, April 2015

Cardiovascular disease deaths drop by40% in 10 Years

- ITV News, August 2015

Mercer est imates that c .£250bn has been added to DB l iabi l i t iesover the last 10 years due to increased l i fe expectancy

Why so many celebrities have died in 2016- BBC, April 2016

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M A R K E T O V E R V I E W

4

I N S U R A N C E I N T E R M E D I A R I E S C A P T I V E S E N D R I S KH O L D E R S

ABBEY LIFE ZURICH

LEGAL & GENERAL

SCHEME-OWNED

OFF-THE-SHELF

REINSURERS

CAPITAL MARKETS

L O N G E V I T Y S W A P B U S I N E S S V O L U M E S

V A L U E O F L I A B I L I T I E S H E D G E D N U M B E R O F T R A N S A C T I O N S

0

1

2

3

4

5

6

7

0

5

10

15

20

25

30

2009 2010 2011 2012 2013 2014 2015

£bn Number

© MERCER 2016 5© MERCER 2016 5

KEY CONSIDERATIONS

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K E Y C O N S I D E R A T I O N S

SHOULD LONGEVITY RISK BE MANAGED?

HOW SHOULD LONGEVITY RISK BE MANAGED?

HOW SHOULD A LONGEVITY SWAP BE STRUCTURED?

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S H O U L D L O N G E V I T Y R I S K B E M A N A G E D ?

SCHEME/ SPONSOR CONTEXT

PRICING

RISKIMPLICATIONS

BUY NOWWHILE STOCKS

LAST?

DATA

SCHEME SIZE

KEYSTAKEHOLDERS

£

© MERCER 2016 8© MERCER 2016 8

NEW WAYS TO MANAGETHE RISK

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“ S T R E A M L I N E D ” L O N G E V I T Y H E D G E

W h a t i s i t ?• I t a l l o w s s c h e m e s t o o s m a l l f o r t h e t r a d i t i o n a l a p p r o a c h t o i n s u r e t h e i r

p e n s i o n e r s ’ l o n g e v i t y r i s k• P r e - a g r e e d t e r m s a n d p l a t f o r m d e v e l o p m e n t w i t h Z u r i c h s t r e a ml i n e t h e p r o c e s s• R e t a i n a l l a s s e t s ( n o u p f r o n t p r e m i u m o r c o l l a t e r a l )

W h a t ’s s o s p e c i a l a b o u t i t ?• U n i q u e i n t h e m a r k e t – n o - o n e o t h e r c o n s u l t a n c y h a s a c c e s s t o t h i s• P r o o f o f c o n c e p t d e l i v e re d i n 2 0 1 5

• r e s u l t e d i n t h e s m a l l e s t e v e r na m e d p e n s i o n e r l o n g e v i t y s w a p ( £ 9 0 m )• 2 n d a n d 3 r d d e a l s e x p e c t e d i n Q 2 2 0 1 6

• P r e - a g r e e d p a n e l o f r e i n s u r e rs w h o Z u r i c h i m m e d i a t e l y s h a r e s r i s k w i t h• S c he m e a s s e t t h a t c a n b e c o n v e r t e d t o a b u l k a nn u i t y l a t e r

W ho d o e s i t a p p l y t o ?• Ap p l i e s f o r a l l s c h e m e s w i t h p e n s i o n e r l i a b i l i t i e s b e t w e e n c . £ 5 0 m a nd £ 5 0 0 m : no t

o n l y f i d u c i a r y / m a na g e d a s s e t c l i e n t s

O t h e r “ s m a l l s c he m e ” s o l u t i o n s• L & G h a s m a rk e t e d a n u n c o l l a t e r a l i s e d l o n g e v i t y h e d g e s i n c e 2 0 1 2 , b u t i s y e t t o

t r a ns a c t f o r p e n s i o n e r l i a b i l i t i e s l e s s t h a n £ 5 0 0 m

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“ P A S S - T H R O U G H ” L O N G E V I T Y H E D G E

W h a t i s i t ?• A v a r i a t i o n o f t he “ t r a d i t i o n a l l y

i n t e r m e d i a t e d ” l o n g e v i t y h e d g e• S t i l l c o n t r a c t i n g w i t h a t r a d i t i o n a l P R A

r e g u l a t e d i n t e r m e d i a r y• N o u p f r o n t p r e m i u m

W h a t ’s s o s p e c i a l a b o u t i t ?• R e d u c e d i n t e r me d i a t i o n f e e – i n

e x c h a n g e f o r t a k i ng o n c r e d i t r i s k o fr e i ns u re r ( a l b e i t c o l l a t e r a l i s e d )

• 1 s t d e a l f o r c . £ 0 . 8 b n c o m p l e t e d i nD e c e m b e r 2 0 1 5

• G r e a t e r f l e x i b i l i t y t h a n t r a d i t i o n a la p p r o a c h o n c o n v e r s i o n t o b u l k a n n u i t ya n d c o s t s a v i n g s

W ho d o e s i t a p p l y t o ?• Ap p l i e s f o r a l l s c h e m e s w i t h p e n s i o n e r

l i a b i l i t i e s b e t w e e n c . £ 5 0 0 m a n d £ 5 b n .

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“ C A P T I V E ” L O N G E V I T Y H E D G E

W h a t i s i t ?• A l o n g e v i t y r i s k t r a ns f e r u s i n g a n

o f f s h o r e i n s u r a nc e c e l l c o m p a n yi n s t e a d o f a t r a d i t i o n a l i n t e r m e d i a r y

• S c he m e - o w n e d o f f s h o r e c e l l e n g a g e sd i r e c t l y w i t h r e i ns u r a nc e m a rk e t o nc o l l a t e r a l i s e d b a s i s

• N o u p f r o n t p r e m i u m

W h a t ’s s o s p e c i a l a b o u t i t ?• R e d u c e d i n t e r me d i a t i o n f e e – i n

e x c h a n g e f o r t a k i ng o n c r e d i t r i s k o fr e i ns u re r ( a l b e i t c o l l a t e r a l i s e d )

• G r e a t e s t f l e x i b i l i t y a n d c o s t s a v i n g s o nc o n v e r s i o n t o b u l k a n n u i t y

• G r e a t e s t c o n t r o l o n v a l u a t i o n a n dc a s h f l o w c a l c u l a t i o n

W ho d o e s i t a p p l y t o ?• Ap p l i e s f o r a l l s c h e m e s w i t h p e n s i o n e r

l i a b i l i t i e s o v e r c £ 1 b n .

© MERCER 2015 12© MERCER 2016 12

NEXT S TEPS ANDQUESTIONS

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N E X T S T E P S

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A N Y Q U E S T I O N S ?

Alan BakerPartnerAlan.Baker@mercer.com020 7178 5531@notjustpensions

Andrew WardPartnerAndrew.X.Ward@mercer.com020 7178 3458

Suthan RajagopalanPrincipalSuthan.Rajagopalan@mercer.com020 7178 3669

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