Derisking UK Pension Plans - Towers Watson

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De-Risking U.K. Pension PlansA OneWorld Presentation

March 31, 2011

© 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com

The changing cost of U.K. pensions

De-risking can help control the cost

£0

£500

£1,000

£1,500

£2,000

£2,500

Jan 85 Jan 87 Jan 89 Jan 91 Jan 93 Jan 95 Jan 97 Jan 99 Jan 01 Jan 03 Jan 05 Jan 07 Jan 09 Jan 11

-December 1985 —Legislation makes indexation to deferred pensions compulsory

April 1997 — Legislation makes indexation to pensions compulsory

2000 to now — Large increases in life expectancy as new mortality data published

2007 to now — Market turmoil has led to uncertainty and volatility

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Getting to the end of the road

No two pension plans are the same

Common themes are that: Risk matters… But the price of risk management has to be acceptable… And any risk taking or management needs to be efficient.

For many, it’s about getting to the destination as quickly as possible…

Without running out of gas or money!

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Keeping it simple

A balance sheet: Assets $250m (50:50, equity:bonds) Funding liability $300m (50:50, pensioners:other) No future accrual Paying off deficit at $6m a year Hope that asset returns will pay for a third to a half of deficit

Price of buying out $350m

Accounting liability similar to funding


Faster, safer (and cheaper?)

Faster — cut/remove liabilities at right price Participants choose to transfer out (ETV) Pensioners choose more pension now, less later (PIE) Participants choose lower cost options at retirement (reshaping)

Safer — efficient risk taking + more hedging Reduce risky assets Reshape risky assets Reduce interest rate and inflation risk Reduce longevity risk

And no increase in cash spend


A liability reduction roadmap

Funding Liability Asset Deficit Buy Out

Shortfall

$m $m $m $m

Start 300 250 50 100

PIE (pensioners) 285 250 35 85

PIE (leavers) 275 250 25 75

ETV 260 235 25 70

PIE (statutory) 235 235 0 55

Reshaping 215 215 0 50


Risk measurement and aspirationsRisks Within the Pension

INSERT SECTION TITLE

0

20

40

60

80

100

120

140

160

Equity Inflation Interest rate Longevity Other Diversification Net risk

Units of risk

Risk budget


Pension Increase Exchange (PIE)

What is it? A member exchanges an increasing pension for a higher but nonincreasing

pension.— Simple example: A member with an increasing pension of £10,000 per year exchanges

this for a flat pension of £15,000 per year.

Option can be offered to pensioners as a bulk exercise. Option can be offered to non-pensioners as an option at retirement.

Why do it? Terms can be set for the exchange that are attractive to the member, but reduce

the liabilities in the plan. Indexation risk (and some longevity risk) has been removed.

Who is doing it? A number of pension plans in the U.K. We have seen high take-up from members where this has been offered, about 50%.

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Enhanced Transfer Values (ETV) What is it? A non-pensioner member takes the value of their pension plan benefits to (most

likely) a personal or current employer’s defined contribution plan. The value of the pension will be enhanced by the original plan sponsor to facilitate

the transfer. Some of the enhancement may be paid as cash to the member.— Simple example: An ex-employee with 15 years of service and a deferred pension of

£12,500 per year receives a transfer payment to their new plan of £180,000, which is enhanced to £200,000, and a payment to the individual of £10,000 in cash.

Why do it? While member take-up is lower than PIE (10% to 25% depending on whether cash

is offered), all liability in respect of transferring members is removed. Take-up is potentially highest among younger members and those with big

pensions, for whom pension risk is greatest.

Who is doing it? A number of pension plans in the U.K.

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Pension reshaping

What is it? A member exchanges other elements of their defined benefit pension for

elements that are more attractive to them.— Simple example: A member with a pension that provides for a 50% spouse’s pension

payable for life exchanges this for a single life pension paid until age 75 and then receives a lump sum.

Why do it? Terms can be set for the exchange that are attractive to the member, but reduce

the liabilities in the plan.

Who is doing it? It is relatively new, but new U.K. Minimum Income Requirement (MIR) legislation

allows much more flexibility in how pensions are provided.

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Setting a plan

2014

2013

2012

2011

2010 Data cleaning

PIE and reshaping — liability reduces by $70 million

ETV — liability reduces by $15 million

Bonds/derivatives to match liabilities

Annuity purchase in readiness for exit

Contributions of no m

ore than $6 million per annum

Target of exit/equilibrium in 10

years or less

De-risk to

the exte

nt affo

rdableOpportunistic buyout if terms merit?


Contact details

Tony Broomhead [email protected]

Mark Duke [email protected]

Paul Kitson [email protected]

Jason Richards [email protected]

Peter Routledge [email protected]

Economy & Finance

Derisking UK Pension Plans - Towers Watson