1. DECOMMISSIONING OF PENSIONS LIABILITIES A career in ascent JAY SHAH CLIVE WELLSTEED 12 TH FEBRUARY 2013

2. Copyright © 2012 Pension Corporation. All rights reserved. 2 Scheme Closures CLOSED TO NEW MEMBERS CLOSED TO FUTURE ACCRUALS OPEN WINDING UP *figures from PPF 7800 index

3. Copyright © 2012 Pension Corporation. All rights reserved. 3 Fragmentation and Inefficiency  Admin Expenses  Other Expenses as % of Total liability (examples)*  £2bn scheme: <5% of total liability  £200m scheme: 7% of total liability  £20m scheme: 15% of total liability  Investment Expenses as % of PV Scheme Liabilities WorstBestSpecialist Insurer 7-10%2-5%3% ~6% (411/6432) of schemes hold 75% of the liabilities Median scheme: ~400 members, £31m

4. Copyright © 2012 Pension Corporation. All rights reserved. 4 2011 – Financial volatility 100bps change in yields =15-25% change in liabilities 145bps fall 52bps fall 93bps fall. Negative real rates 5.6% fall

5. Copyright © 2012 Pension Corporation. All rights reserved. 5 2011 – Schemes battered Commentary: ■ Typical scheme: Deferreds and pensioners: Say £100m buyout cost ■ Assets (£70m): 55% (£38.5m) equities, 20% (£14m) corporate bonds, 25% (£17.5m) gilts ■ Start funding level: 70% ■ End funding level: 61% Commentary: ■ Typical scheme: Deferreds and pensioners: Say £100m buyout cost ■ Assets (£70m): 55% (£38.5m) equities, 20% (£14m) corporate bonds, 25% (£17.5m) gilts ■ Start funding level: 70% ■ End funding level: 61% Funding to buyout 61%

6. Copyright © 2012 Pension Corporation. All rights reserved. 6 Managing risk efficiently Company Trustee Reinsurers Insurers Capital markets Yield generation LDI provider Fiduciary manager Risk pooling Access to specialist risk takers Company Wants stable contributions Acceptable risk Trustee Set strategy or Sense-test strategy? ■ Company appetite for level and timing of cash contributions will influence which route is favoured

7. Copyright © 2012 Pension Corporation. All rights reserved. 7 Best estimate EIOPA proposals may result in pension schemes thinking about risk differently in future….. Risk margin Technical Provisions SCR MCR Additional capital requirements Value of pension scheme liabilities Market value of pension scheme assets Value placed on assets and covenant Value of sponsor covenant / PPF Value of contingent assets Best estimate Solvency Capital Requirement Minimum Capital Requirement The SCR is the capital required to be 99.5% confident of not having assets less than liabilities one year from now

8. Copyright © 2012 Pension Corporation. All rights reserved. 8 What might be the impact of EIOPA’s proposals for DB pension schemes? Even with a long transition period, implications of EIOPA’s proposals include:  How trustees and companies set Technical Provisions –EG Target buy-out reserving, or even higher, in 15 years Options for Technical Provisions discount rates currently available to EIOPA –Allow current differing practices to continue across member states –Push for change to the Directive to make clear that a risk-free discount rate should be used – A “two-tier” approach  Investment  Contingent assets / covenant  Substantial increase in reporting, disclosure and governance requirements Increased interest in buy-in and buyout?

9. Copyright © 2012 Pension Corporation. All rights reserved. 9 Nuclear Decommissioning – Solutions? Nuclear Decommissioning OptionsPension Scheme options Immediate Dismantling -Removed from regulatory control after shutdown -Final shut down activities begin -Site available for re-use once cleared Buyout to insurance company Safe Enclosure -Regulatory controls remain -Safe storage configuration -Eventual dismantling and decontamination Phased Buy-out or industry pooling Entombment -Radioactive material to remain on-site -Decay without removal Scheme run-off (PPF?)

10. Copyright © 2012 Pension Corporation. All rights reserved. 10 Pension scheme decommissioning Similar situation to nuclear decommissioning in the UK actuarial pensions market Actuary qualifying now, retiring at 65

11. Copyright © 2012 Pension Corporation. All rights reserved. 11 The Pension Assurance actuary – skill set Asset Liability Management Thinking in risk and probabilistic terms Deep technical understanding Wider understanding of different environments and commercial awareness Most of all you must love pensions

12. Copyright © 2012 Pension Corporation. All rights reserved. 12 The pension insurance market UK pension risk transfer transacted since 2004 Source: PC analysis, LCP buyout report 2010, Hymans Robertson buyout report 2009, 2010 and 2011

13. Copyright © 2012 Pension Corporation. All rights reserved. 13 Bulk annuity insurers Market share Q2 2008 – Q1 2012 Total £20.3bn Others* Source: Hymans Robertson buyout report * Others referrs to Paternoster, Aegon and AIG

14. Copyright © 2012 Pension Corporation. All rights reserved. 14 Case study Pensioners 2012 retirees 2013 retirees 2014 retirees £158m insured upfront Annual tranches 2011 Decommissioning journey plan

15. Copyright © 2012 Pension Corporation. All rights reserved. 15 Putting together a business case for a buy-in or buy-out Removes or reduces pension risk Cash contributions Accounting volatility Running costs (including PPF levies) Journey plan / glide-path What are the other benefits? Management time More flexibility for future corporate activity Removes future regulatory risk Is the price to de-risk Affordable? Value-for-money? Asset prices against annuity prices Be ready to counter opposing views “In their haste to get rid of pension funds, companies are in danger of paying through the nose to remove risks that may not even exist or, if they do, are pretty small.” Anthony Hilton, Evening Standard, 8 June 2011

16. Copyright © 2012 Pension Corporation. All rights reserved. 16 Expanding the journey plan to include buy-out

17. Copyright © 2012 Pension Corporation. All rights reserved. 17 A five stage process for a buy-in or buy-out Finalise legal contract Agree key commercial terms with shortlisted insurers Source accurate quotations Assess feasibility Six months ?? Post execution

18. Copyright © 2012 Pension Corporation. All rights reserved. 18 Governance framework 1.Governance structure ■ Appropriate trustee and corporate representation ■ What is working party’s remit and objectives? ■ Will it make decision or recommendations? ■ Who does the working party report to? 2.Establish broad agreement on an acceptable price / additional cash requirements 3.Agree key milestones and overall project timeline Working Party CompanyTrustees

19. Copyright © 2012 Pension Corporation. All rights reserved. 19 Minimising asset risk during premium payment Key risks to manage Out-of-market exposure Market illiquidity Pooled fund issues – notification and settlement periods Assets in scheme Insurer In-specie transfer Sell for cash Cash to insurer Cash

20. Copyright © 2012 Pension Corporation. All rights reserved. 20 The legal contract There are plenty of areas where actuaries can add value to the legal process: Documenting the premium agreed with the insurer Mechanics for how and when to pay the premium How assets in specie will be valued Some of the Trustee warranties e.g. completeness and accuracy of the data Data cleansing process – correcting the data Re-calculation of the premium using the corrected data Option factors Potential benefit restructuring and the financial terms to apply Other future proofing eg administration transfer, buy-out, PPF, winding up... and lots more...

21. Copyright © 2012 Pension Corporation. All rights reserved. 21 QUESTIONS?