Pension Corporation today announces the consolidation of its position as a leading UK specialist provider of pension solutions with the commencement of a second-round fundraising of core equity capital. The fundraising is to be launched on the back of an immediate investment by J.P. Morgan and will allow Pension Corporation to provide security to many more defined benefit pension scheme members.

As part of the agreement, Pension Corporation will acquire assets and key members of the team of Synesis Life, a UK insurer of bulk annuities backed by J.P. Morgan, The Royal Bank of Scotland and Warburg Pincus.

The fundraising will be offered first to current investors and thereafter will be marketed to new investors in the first half of 2009. Pension Insurance Corporation is an authorised insurance company, regulated by the Financial Services Authority (“FSA”).

The funds will improve Pension Corporation’s ability to meet the fast-growing pipeline of pension enquiries, which now exceed £100 billion across the group’s range of solutions, including its ground breaking insurance of longevity risk.

The fundraising would be raised at a premium on terms that reflect Pension Corporation’s robust foundations and the approximate £5 billion of pension assets already under its stewardship. The acquisition of the Synesis Life team increases Pension Insurance Corporation’s capacity to handle its growing share of the fast expanding pension risk transfer market.

John Coomber, Executive Vice Chairman of Pension Corporation, commented:

“We are delighted to have an investor of J.P. Morgan’s stature back our vision of providing a comprehensive set of pension risk transfer solutions. We also welcome the Synesis team, who round out our skills and capacity to deal with complex pension risk transfers as we expand further.”

Edmund Truell, Chief Executive of Pension Corporation, commented:

“The pension risk transfer market is growing rapidly. The extra capital we are raising, led by J.P. Morgan, will extend our capacity to take market share in areas with the right balance of risk and reward. This significantly increases our ability to play a leading role in addressing the historic legacy of defined benefit pension liabilities, which amount to more than twice the size of the UK’s national debt and nearly equal the country’s total gross domestic product. We are ready to provide long-term security for hundreds of thousands more pension fund members across the country.”

Edward Giera, Managing Director, Pensions Advisory Group J. P. Morgan, commented:

“J.P. Morgan is pleased to support Pension Corporation’s equity capital increase. The significant range and complexity of the challenges facing UK defined benefit pension funds requires a variety of solutions, and the combination of Pension Corporation with Synesis Life team will create a powerful force in the UK market.”

Enquiries

Pension Corporation
Jeremy Apfel
+44 (0)20 7451 3725

Petra Peliskova
+44 (0)20 7451 6688

FD
Rob Bailhache
+44 (0)20 7269 7200

Nick Henderson
+44 (0)20 7269 7114

Christine Wood
+44 (0)20 7269 7253

Notes to Editors

The Pension Corporation group provides the following solutions to defined benefit pension funds:

• Insurance Buy-out
• Longevity Insurance
• Pension Fund Sponsorship
• Asset Liability Management

These solutions enable pension funds to protect their members’ benefits by strengthening and stabilising their financial position, and enable their employers/sponsors to protect themselves against the volatility of their earnings and balance sheet values.

Insurance Buy-out: An insurance policy is issued by Pension Insurance Corporation (“PIC”), which gives the members of the pension fund the security of having their benefits underwritten by a fully FSA-authorised and regulated insurance company and removing the responsibility for the pension fund payments from the balance sheet of the employer/sponsor. PIC can undertake the insurance in respect of all or some classes of the members, according to what the fund can afford, and is able to act quickly and in a flexible way (for example by offering different ways of financing the transaction).

Longevity Insurance: PIC offers a longevity insurance policy, the first of its kind in the world, to protect pension funds and their employer/sponsor against the cost of pensioners living longer than expected. The policy is tailored to the member-by-member profile of the fund so as to provide comprehensive “whole of life” protection against what is perhaps the most significant risk faced by pension funds and their employers/sponsors. Inflation risk can be included or covered separately by an inflation swap.

Pension Fund Sponsorship: Typically used where a fund cannot afford a pension insurance buy-out immediately, Pension Fund Sponsorship involves the Pension Corporation group becoming the owner of the employer/sponsor of the pension fund. In this way, the fund gains the additional backing of the Pension Corporation Group, while continuing to have the backing of the original sponsor and of the assets of the fund itself. Under this model financial returns to Pension Corporation can only be drawn once the pension fund members’ benefits have been secured by way of an insurance contract. For each of the three pension schemes where Pension Corporation has acquired the employer/sponsor, it has advocated a reduction in the risk level of the pension fund assets, which shows the conservatism of Pension Corporation’s views on investment management and its emphasis on pensioner security.

Asset Liability Management: Pension Corporation has a highly experienced investment management team, which is able to analyse assets and liabilities of pension schemes. It can manage pension fund assets on a fee basis.

Security

Pension Corporation has been supported in its growth by its founding investors, which include J.C. Flowers, Royal Bank of Scotland, HBOS, Swiss Re, and Istithmar World. Established by the Truell Charitable Foundation, its Board and management include a number of expert and highly experienced insurance industry executives, including Sir Mark Weinberg, co-founder of St James’s Place Wealth Management Group; John Coomber, former Chief Executive of Swiss Re; Sir Martin Jacomb, former Chairman of Prudential Assurance Group; Bob Scott, former Group Chief Executive of Aviva; Philip Moore, former Chief Executive of Friends Provident; and John Fitzpatrick, former Chief Financial Officer of Swiss Re. Pension Corporation has some £5 billion of pension assets under its stewardship.

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Pension Corporation, a leading provider and underwriter of pension solutions, yesterday launched Pensions Tomorrow, a new initiative in association with the Department of Management at the London School of Economics and Political Science (“LSE”).

The Pensions Tomorrow initiative aims to bring together industry leaders, government, regulators and think-tanks to debate the growing issues of pensions and longevity in an independent forum. It will produce high-quality and timely commentary for a broad audience, and independent peer-reviewed research on the major issues facing pensions.

Last night’s inaugural seminar at the LSE was chaired by Professor Paul Willman, Department of Management, and featured speeches from Howard Davies, Director of the LSE, and Edmund Truell, CEO of Pension Corporation. The event welcomed around thirty guests including Lawrence Churchill, Chairman of the Pension Protection Fund, David Norgrove, Chairman of The Pensions Regulator, John Hills, Director of the Centre for Analysis of Social Exclusion and Peter Moon, Chief Investment Officer of the Universities Superannuation Scheme Limited.

Pensions Tomorrow will be an ongoing forum with a broad remit, examining all aspects of the pensions landscape including policy and regulation, the role of capital markets in pensions provision, asset-liability management, public and private sector pensions, longevity, socio-political considerations, labour market issues and the economic history of pensions, both in the UK and internationally. Drawing on expertise within Pension Corporation and the Department of Management, as well as other LSE departments such as Accounting, Finance, Economics and Sociology, Pensions Tomorrow will subject widely held assumptions regarding pension provision to scrutiny.

Edmund Truell, Chief Executive of Pension Corporation, commented:

“Pension Corporation is delighted to have launched this new initiative with the LSE and the Department of Management, which has an enviable global reputation. I would like to thank everyone who attended yesterday’s seminar for making it such a success. We are confident that the broad remit of Pensions Tomorrow and the wealth of expertise amongst all those involved will provide the catalyst for an open debate about the tough questions that need to be answered regarding the future provision of pensions.”

Paul Willman, Professor, Department of Management, LSE, commented:

“We are delighted to welcome Pension Corporation on board as the Founding Sponsor of this bold new venture. We intend to establish a multi-disciplinary centre for the examination of pension provision and the implementation of sustainable retirement systems. Our central question for Pensions Tomorrow is simple: how do we structure the future provision of pensions, taking into account wider economic, demographic and societal considerations both at home and abroad?”

A podcast of the seminar will be available at
http://www.lse.ac.uk/collections/management/pensionsTomorrow/newsandevents.htm

For more information on Pensions Tomorrow please visit
http://www.lse.ac.uk/collections/management/pensionsTomorrow.

Enquiries

Pension Corporation
Petra Peliskova
+44 (0)20 7451 6688

FD
Rob Bailhache
+44 (0)20 7269 7200

Nick Henderson
+44 (0)20 7269 7114

Caroline Parker
+44 (0)20 7269 7295

Notes to Editors

The Pension Corporation group provides the following solutions to defined benefit pension funds:

• Insurance Buy-out
• Longevity Insurance
• Pension Fund Sponsorship
• Asset Liability Management

These solutions enable pension funds to protect their members’ benefits by strengthening and stabilising their financial position, and enable their employers/sponsors to protect themselves against the volatility of their earnings and balance sheet values.

Insurance Buy-out: An insurance policy is issued by Pension Insurance Corporation (“PIC”), which gives the members of the pension fund the security of having their benefits underwritten by a fully FSA-authorised and regulated insurance company and removing the responsibility for the pension fund payments from the balance sheet of the employer/sponsor. PIC can undertake the insurance in respect of all or some classes of the members, according to what the fund can afford, and is able to act quickly and in a flexible way (for example by offering different ways of financing the transaction).

Longevity Insurance: PIC offers a longevity insurance policy, the first of its kind in the world, to protect pension funds and their employer/sponsor against the cost of pensioners living longer than expected. The policy is tailored to the member-by-member profile of the fund so as to provide comprehensive “whole of life” protection against what is perhaps the most significant risk faced by pension funds and their employers/sponsors. Inflation risk can be included or covered separately by an inflation swap.

Pension Fund Sponsorship: Typically used where a fund cannot afford a pension insurance buy-out immediately, Pension Fund Sponsorship involves the Pension Corporation group becoming the owner of the employer/sponsor of the pension fund. In this way, the fund gains the additional backing of the Pension Corporation Group, while continuing to have the backing of the original sponsor and of the assets of the fund itself. Under this model financial returns to Pension Corporation can only be drawn once the pension fund members’ benefits have been secured, in much the same manner as funds within an insurance company. For each of the three pension schemes where Pension Corporation has acquired the employer/sponsor, it has advocated a reduction in the risk level of the pension fund assets, which shows the conservatism of Pension Corporation’s views on investment management and its emphasis on pensioner security.

Asset Liability Management: Pension Corporation has a highly experienced investment management team, which is able to advise on state-of-the-art asset and liability management. It offers this service on a fee basis or, in the case of funds under the sponsorship of companies owned by it, without charge.

Security

Pension Corporation is backed by large blue chip financial services companies. Its Board and management include a number of expert and highly experienced insurance industry executives, including Sir Mark Weinberg, co-founder of St James’s Place Wealth Management Group, John Coomber, former Chief Executive of Swiss Re, Sir Martin Jacomb, former Chairman of the Prudential Assurance Group, Bob Scott, former Group Chief Executive of Aviva and John Fitzpatrick, former Chief Financial Officer of Swiss Re. Pension Corporation has almost £5 billion of pension assets under its stewardship.

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Pension Corporation, a leading provider and underwriter of pension solutions, today announces the appointment of Dr Frank Eich as Senior Economist, effective immediately.

Dr Eich will chiefly be responsible for economic issues relating to public and private sector pensions, and will work with the Longevity Risk Management team at Pension Corporation to better assess and manage the risk originating from the uncertainty of future longevity trends – the greatest challenge for pension funds today. He will also collaborate with Dr Amarendra Swarup to develop Pension Corporation’s programme of setting up independent research initiatives with strategic partners such as the London School of Economics to produce high quality thought leadership on pension-related issues.

He joins Pension Corporation on secondment from HM Treasury where until early 2008 he headed the Long Term unit within the Macro and Fiscal Policy Directorate. Dr Eich has worked extensively on issues such as long-term fiscal sustainability, the macroeconomics of pension provision and long-term labour market trends.

In his role at the Treasury, Dr Eich also worked closely with the Department for Work and Pensions, the Government Actuary's Department, National Statistics and the Government’s Foresight Project, and represented the UK at the European level as a member of the Economic Policy Committee’s Working Group on Ageing Populations.

Prior to joining HM Treasury Dr Eich worked as a country economist at the Economist Intelligence Unit. He was a visiting fellow at the International Monetary Fund in 2004 and spent six months in 2008 at the German finance ministry working on European and international economic issues. Dr Eich holds a PhD in Economics from the London School of Economics.

Edmund Truell, Chief Executive of Pension Corporation, commented:

“I am delighted to welcome Frank to Pension Corporation. His wealth of experience and deep knowledge of the key economic issues regarding public and private pensions will be invaluable as we continue to grow and develop our range of solutions for defined benefit pension funds.”

Enquiries

Pension Corporation
Petra Peliskova
+44 (0)20 7451 6688

FD
Rob Bailhache
+44 (0)20 7269 7200

Nick Henderson
+44 (0)20 7269 7114

Caroline Parker
+44 (0)20 7269 7295

Notes to Editors

The Pension Corporation group provides the following solutions to defined benefit pension funds:

• Insurance Buy-out
• Longevity Insurance
• Pension Fund Sponsorship
• Asset Liability Management

These solutions enable pension funds to protect their members’ benefits by strengthening and stabilising their financial position, and enable their employers/sponsors to protect themselves against the volatility of their earnings and balance sheet values.

Insurance Buy-out: An insurance policy is issued by Pension Insurance Corporation (“PIC”), which gives the members of the pension fund the security of having their benefits underwritten by a fully FSA-authorised and regulated insurance company and removing the responsibility for the pension fund payments from the balance sheet of the employer/sponsor. PIC can undertake the insurance in respect of all or some classes of the members, according to what the fund can afford, and is able to act quickly and in a flexible way (for example by offering different ways of financing the transaction).

Longevity Insurance: PIC offers a longevity insurance policy, the first of its kind in the world, to protect pension funds and their employer/sponsor against the cost of pensioners living longer than expected. The policy is tailored to the member-by-member profile of the fund so as to provide comprehensive “whole of life” protection against what is perhaps the most significant risk faced by pension funds and their employers/sponsors. Inflation risk can be included or covered separately by an inflation swap.

Pension Fund Sponsorship: Typically used where a fund cannot afford a pension insurance buy-out immediately, Pension Fund Sponsorship involves the Pension Corporation group becoming the owner of the employer/sponsor of the pension fund. In this way, the fund gains the additional backing of the Pension Corporation Group, while continuing to have the backing of the original sponsor and of the assets of the fund itself. Under this model financial returns to Pension Corporation can only be drawn once the pension fund members’ benefits have been secured, in much the same manner as funds within an insurance company. For each of the three pension schemes where Pension Corporation has acquired the employer/sponsor, it has advocated a reduction in the risk level of the pension fund assets, which shows the conservatism of Pension Corporation’s views on investment management and its emphasis on pensioner security.

Asset Liability Management: Pension Corporation has a highly experienced investment management team, which is able to advise on state-of-the-art asset and liability management. It offers this service on a fee basis or, in the case of funds under the sponsorship of companies owned by it, without charge.

Security

Pension Corporation is backed by large blue chip financial services companies. Its Board and management include a number of expert and highly experienced insurance industry executives, including Sir Mark Weinberg, co-founder of St James’s Place Wealth Management Group, John Coomber, former Chief Executive of Swiss Re, Sir Martin Jacomb, former Chairman of the Prudential Assurance Group, Bob Scott, former Group Chief Executive of Aviva and John Fitzpatrick, former Chief Financial Officer of Swiss Re. Pension Corporation has almost £5 billion of pension assets under its stewardship.

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Pension Corporation, a leading provider of pension solutions, is delighted to announce the appointment of Louise Inward as general counsel. Ms Inward, a qualified barrister, was formerly head of the pensions practice at PricewaterhouseCoopers Legal. Her appointment is effective as of 3rd November, 2008.

In her role, Ms Inward will be chiefly responsible for advising Pension Corporation on all aspects of the regulatory and legal issues, and developments in the pensions sector. Ms Inward will be working across the Group, including advising the business development, origination and liability and risk management teams.

Ms Inward brings a wealth of experience accrued in the pensions industry from senior positions across the private and public sector advising sponsors and trustees on all matters of pensions issues and notably, corporate transactions and scheme funding. Prior to joining PwC, Ms Inward was Head of Corporate Risk Management (CRM) at the Pensions Regulator. During her tenure there, Ms Inward was involved in the evolution of the Pensions Act 2004 and the regulatory requirements under it, and in the formation of the Corporate Risk Management team.

Edmund Truell, Chief Executive Officer of Pension Corporation, commented:

“I am very pleased to welcome Louise to Pension Corporation. Her wide array of experience will further strengthen our team of recognised pensions experts. I know Louise will make an immediate impact in contributing toward the exciting development of Pension Corporation.”

Louise Inward said:

“Pension Corporation has built a highly skilled and experienced team to provide solutions to the pension liability risk transfer market. I am excited to be joining Pension Corporation to assist in building on its track record and strengthening its specialist services to the pensions’ market.”

Enquiries

Pension Corporation
Petra Peliskova
+44 (0)20 7451 6688

FD
Rob Bailhache
+44 (0)20 7269 7200

Nick Henderson
+44 (0)20 7269 7114

Caroline Parker
+44 (0)20 7269 7295

Notes to Editors

The Pension Corporation group provides the following solutions to defined benefit pension funds:

• Insurance Buy-out
• Longevity Insurance
• Pension Fund Sponsorship
• Asset Liability Management

These solutions enable pension funds to protect their members’ benefits by strengthening and stabilising their financial position, and enable their employers/sponsors to protect themselves against the volatility of their earnings and balance sheet values.

Insurance Buy-out: An insurance policy is issued by Pension Insurance Corporation (“PIC”), which gives the members of the pension fund the security of having their benefits underwritten by a fully FSA-authorised and regulated insurance company and removing the responsibility for the pension fund payments from the balance sheet of the employer/sponsor. PIC can undertake the insurance in respect of all or some classes of the members, according to what the fund can afford, and is able to act quickly and in a flexible way (for example by offering different ways of financing the transaction).

Longevity Insurance: PIC offers a longevity insurance policy, the first of its kind in the world, to protect pension funds and their employer/sponsor against the cost of pensioners living longer than expected. The policy is tailored to the member-by-member profile of the fund so as to provide comprehensive “whole of life” protection against what is perhaps the most significant risk faced by pension funds and their employers/sponsors. Inflation risk can be included or covered separately by an inflation swap.

Pension Fund Sponsorship: Typically used where a fund cannot afford a pension insurance buy-out immediately, Pension Fund Sponsorship involves the Pension Corporation group becoming the owner of the employer/sponsor of the pension fund. In this way, the fund gains the additional backing of the Pension Corporation Group, while continuing to have the backing of the original sponsor and of the assets of the fund itself. Under this model financial returns to Pension Corporation can only be drawn once the pension fund members’ benefits have been secured, in much the same manner as funds within an insurance company. For each of the three pension schemes where Pension Corporation has acquired the employer/sponsor, it has advocated a reduction in the risk level of the pension fund assets, which shows the conservatism of Pension Corporation’s views on investment management and its emphasis on pensioner security.

Asset Liability Management: Pension Corporation has a highly experienced investment management team, which is able to advise on state-of-the-art asset and liability management. It offers this service on a fee basis or, in the case of funds under the sponsorship of companies owned by it, without charge.

Security

Pension Corporation is backed by large blue chip financial services companies, including The Royal Bank of Scotland, HBOS and Swiss Re. Its Board and management include a number of expert and highly experienced insurance industry executives, including Sir Mark Weinberg, co-founder of St James’s Place Wealth Management Group, John Coomber, former Chief Executive of Swiss Re, Sir Martin Jacomb, former Chairman of the Prudential Assurance Group, Bob Scott, former Group Chief Executive of Aviva and John Fitzpatrick, former Chief Financial Officer of Swiss Re. Pension Corporation has almost £5 billion of pension assets under its stewardship.

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Once the preserve of wealthy families and viewed with deep suspicion by nearly everyone else, private equity is increasingly a valuable tool for pension schemes looking to diversify their portfolios and improve their funding positions.

Investors have been dabbling in private equity for centuries, with early well-known examples including the old Victorian merchant banks and the original JPMorgan. Today, it is a diverse field encompassing everything from venture capital investors in small start-ups, to buyout specialists looking to restructure poorly managed public companies, to distressed strategies, which hope to turnaround otherwise doomed enterprises.

In recent years, institutional investors have begun to turn their attention towards accessing this complex asset class through specialist private equity funds. The European Private Equity and Venture Capital Association estimates that 23% of the total money raised by Europe-based private equity funds between 2003 and 2007 came from pension funds, with nearly another 10% coming from insurance companies.

The rapid growth is no coincidence – private equity has shown long-term historical outperformance over publicly traded stocks across most sectors. The ability to invest in entrepreneurs and exposure to often smaller companies can also provide valuable diversification to the typical pension fund equity portfolio, and can also help improve returns without significantly impacting the risk profile.

There are caveats. Most private equity investments are illiquid and long-term, requiring investors to commit for five to 10 years. There is limited transparency, with few of the requirements or regulations that typify listed stocks. Every niche and industry requires a different skill set and knowledge base. These combine to make any risk assessment and valuation difficult, contributing to the suspicion of private equity held by many today.

However, as with any field of investment, it’s all about understanding the unique characteristics of that asset class. This active approach is key to the creation and extraction of value from these investments, and to the superior long-term performance generated by the private equity sector.

One option is to consider external asset-liability management providers with expert knowledge, who manage the assets and liabilities for trustees on a holistic real-time basis and ensure assets are effectively diversified, with a judicious and risk-controlled allocation to private equity.

It is a complex area, but one with invaluable benefits for those pension funds willing to expand their knowledge and explore innovative ways of optimising their portfolios. The rise of experts who can partner with them means that they are not alone on this journey.

Jargon buster

Courtesy of Aviva Investors’ Trustee Tutor

Fat tails
A statistical reference to the idea that returns from markets may vary more than we tend to think.

Fiduciary
A very high standard of behaviour. If you have a fiduciary relationship with someone, you have an obligation (over and above any contract you have with them) to act in their interests, not yours. You also have an obligation not to put yourself in a position where you have a conflict of interest. An investment manager owes fiduciary obligations to the client. A pension fund trustee has a series of fiduciary obligations to the beneficiaries (or members) of the pension trust fund.

Flight to quality
When investors get nervous, they prefer to invest in less risky assets, such as cash and government bonds. The trouble is that it is quite imprecise: are pricey government bonds less risky than cheap small companies? Over what time horizon? Herd behaviour often applies.

Future
Binding agreement to do something in the future. If you buy an option, you are buying a right to do something in the future, if you want to. If you buy a future, you agree to do something in the future, even if you might not want to. Future contracts can be traded on futures exchanges, so you could pass on the buying obligation to someone else.

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Pension Corporation, a leading provider and underwriter of pension solutions, today announces the appointment of Philip Moore as Group Finance Partner, effective immediately.

Mr Moore, 48, who was previously Chief Executive and Group Finance Director of Friends Provident and more recently Chief Finance Officer of HM Revenue and Customs, will be facilitating the strategic development of the Pension Corporation group.

Mr Moore brings over 25 years’ experience of the life insurance and pensions industry, holding other senior management roles such as Partner and leader of the insurance consulting group at PricewaterhouseCoopers in Southeast Asia; Finance Director and Actuary and Chairman of the Investment Committee at NPI; and as Corporate Director Finance and Head of M&A at AMP.

In Mr Moore’s time at Friends Provident, life and pensions sales and underlying earnings per share increased significantly. He was responsible for facilitating at group level the F&C Asset Management turnaround plan and led the proposed merger with Resolution which was outbid.

Edmund Truell, Chief Executive of Pension Corporation, commented:

“I am delighted to welcome Philip to Pension Corporation. I am confident that his deep experience of the pensions industry, coupled with his formidable reputation for delivering results, will be of huge benefit to Pension Corporation.”

Mr Moore said:

“Pension Corporation has developed an impressive business in a very short space of time and a reputation for providing highly sophisticated and innovative solutions to the pension liability risk transfer market. I am delighted to be joining Pension Corporation at such an exciting time in its development.”

Enquiries

Pension Corporation
Petra Peliskova
+44 (0)20 7451 6688

FD
Rob Bailhache
+44 (0)20 7269 7200

Nick Henderson
+44 (0)20 7269 7114

Caroline Parker
+44 (0)20 7269 7295

Notes to Editors

The Pension Corporation group provides the following solutions to defined benefit pension funds:

• Insurance Buy-out
• Longevity Insurance
• Pension Fund Sponsorship
• Asset Liability Management

These solutions enable pension funds to protect their members’ benefits by strengthening and stabilising their financial position, and enable their employers/sponsors to protect themselves against the volatility of their earnings and balance sheet values.

Insurance Buy-out: An insurance policy is issued by Pension Insurance Corporation (“PIC”), which gives the members of the pension fund the security of having their benefits underwritten by a fully FSA-authorised and regulated insurance company and removing the responsibility for the pension fund payments from the balance sheet of the employer/sponsor. PIC can undertake the insurance in respect of all or some classes of the members, according to what the fund can afford, and is able to act quickly and in a flexible way (for example by offering different ways of financing the transaction).

Longevity Insurance: PIC offers a longevity insurance policy, the first of its kind in the world, to protect pension funds and their employer/sponsor against the cost of pensioners living longer than expected. The policy is tailored to the member-by-member profile of the fund so as to provide comprehensive “whole of life” protection against what is perhaps the most significant risk faced by pension funds and their employers/sponsors. Inflation risk can be included or covered separately by an inflation swap.

Pension Fund Sponsorship: Typically used where a fund cannot afford a pension insurance buy-out immediately, Pension Fund Sponsorship involves the Pension Corporation group becoming the owner of the employer/sponsor of the pension fund. In this way, the fund gains the additional backing of the Pension Corporation Group, while continuing to have the backing of the original sponsor and of the assets of the fund itself. Under this model financial returns to Pension Corporation can only be drawn once the pension fund members’ benefits have been secured, in much the same manner as funds within an insurance company. For each of the three pension schemes where Pension Corporation has acquired the employer/sponsor, it has advocated a reduction in the risk level of the pension fund assets, which shows the conservatism of Pension Corporation’s views on investment management and its emphasis on pensioner security.

Asset Liability Management: Pension Corporation has a highly experienced investment management team, which is able to advise on state-of-the-art asset and liability management. It offers this service on a fee basis or, in the case of funds under the sponsorship of companies owned by it, without charge.

Security

Pension Corporation is backed by large blue chip financial services companies. Its Board and management include a number of expert and highly experienced insurance industry executives, including Sir Mark Weinberg, co-founder of St James’s Place Wealth Management Group, John Coomber, former Chief Executive of Swiss Re, Sir Martin Jacomb, former Chairman of the Prudential Assurance Group, Bob Scott, former Group Chief Executive of Aviva and John Fitzpatrick, former Chief Financial Officer of Swiss Re. Pension Corporation has almost £5 billion of pension assets under its stewardship.

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Pension Corporation, a leading provider of pension solutions, estimates that the capacity of the UK pensions’ buyout market will have to grow by nearly £250 billion over the next three years if the current levels of demand from trustees are to be met, according to new research by Pension Insurance Corporation (PIC), the Group’s fully authorised and Financial Services Authority regulated insurance company. New capacity of £250 billion represents an increase of more than 80 times over the aggregate value of pensions’ buyout transactions in 2007. Pension Corporation estimates that £30 billion of additional solvency capital will be required to underpin buyout demand.

The research echoes a recent poll by Hymans Robertson, which indicated that nearly a third of trustees expect their scheme will be bought out within the next decade.

The last two years has seen an explosion of activity in the pension insurance market with £2.9 billion of insurance deals transacted in 2007 and £5 billion in the first half of 2008. By the end of this year, the total could surpass £10 billion. Additionally the corporate deals market, where Pension Corporation and Citibank took on the sponsorship of over £4.5 billion of pension liabilities, and insurer to insurer bulk annuity transfers totalling over £10 billion, have also absorbed substantial capacity. Key to this growth has been the attractive pricing and innovative solutions offered by insurers such as Pension Insurance Corporation, as evidenced by their partial buyout of Delta Plc’s pensioner liabilities. Another notable example of the innovation offered is PIC’s recent buyout of the orphaned UK Can scheme, which left the members with greater benefits than they would have otherwise had under the PPF.

Pension Insurance Corporation estimates that the current capacity of the pensions’ buyout market could accommodate up to another £25 billion of buyout transactions, significantly less than the demand expressed by trustees. Current buyout liabilities for the private sector are approximately £1.2 trillion. If 31% of these transact over the next decade as indicated by Hymans Robertson’s poll, nearly £350 billion of additional capacity will need to be found by the industry, according to Dr. Amarendra Swarup at Pension Corporation. Much of this will be required within the next three years if current levels of demand are to be met.

Edmund Truell, Chief Executive of Pension Corporation, commented:

“These estimates from both Hymans Robertson and ourselves reaffirm the immense growth potential inherent in the pension solutions sector. We are confident that Pension Insurance Corporation is well placed to help trustees secure their members’ benefits. Indeed, it was in anticipation of this future growth that we raised nearly £1 billion of capital. As the popularity of pension insurance continues to grow, we look forward to meeting the demand from trustees and sponsors to reduce risk in their pension funds.”

John Coomber, Executive Vice Chairman of Pension Corporation, commented:

“I believe we are witnessing a paradigm shift in the pensions’ industry. Buyouts are the obvious way for trustees and sponsors to take risk off the balance sheet and secure members’ benefits. Pension Corporation has a strong support base of committed blue chip investors and we are confident of our capacity to accommodate the market's growing appetite for pension solutions.”

Enquiries

Pension Corporation
Petra Peliskova
+44 (0)20 7451 6688

FD
Rob Bailhache
+44 (0)20 7269 7200

Nick Henderson
+44 (0)20 7269 7114

Christine Wood
+44 (0)20 7269 7253

Notes to Editors

The Pension Corporation group provides the following solutions to defined benefit pension funds:

• Insurance Buy-out
• Longevity Insurance
• Pension Fund Sponsorship
• Asset Liability Management

These solutions enable pension funds to protect their members’ benefits by strengthening and stabilising their financial position, and enable their employers/sponsors to protect themselves against the volatility of their earnings and balance sheet values.

Insurance Buy-out: An insurance policy is issued by Pension Insurance Corporation (“PIC”), which gives the members of the pension fund the security of having their benefits underwritten by a fully FSA-authorised and regulated insurance company and removing the responsibility for the pension fund payments from the balance sheet of the employer/sponsor. PIC can undertake the insurance in respect of all or some classes of the members, according to what the fund can afford, and is able to act quickly and in a flexible way (for example by offering different ways of financing the transaction).

Longevity Insurance: PIC offers a longevity insurance policy, the first of its kind in the world, to protect pension funds and their employer/sponsor against the cost of pensioners living longer than expected. The policy is tailored to the member-by-member profile of the fund so as to provide comprehensive “whole of life” protection against what is perhaps the most significant risk faced by pension funds and their employers/sponsors. Inflation risk can be included or covered separately by an inflation swap.

Pension Fund Sponsorship: Typically used where a fund cannot afford a pension insurance buy-out immediately, Pension Fund Sponsorship involves the Pension Corporation group becoming the owner of the employer/sponsor of the pension fund. In this way, the fund gains the additional backing of the Pension Corporation Group, while continuing to have the backing of the original sponsor and of the assets of the fund itself. Under this model financial returns to Pension Corporation can only be drawn once the pension fund members’ benefits have been secured, in much the same manner as funds within an insurance company. For each of the three pension schemes where Pension Corporation has acquired the employer/sponsor, it has advocated a reduction in the risk level of the pension fund assets, which shows the conservatism of Pension Corporation’s views on investment management and its emphasis on pensioner security.

Asset Liability Management: Pension Corporation has a highly experienced investment management team, which is able to advise on state-of-the-art asset and liability management. It offers this service on a fee basis or, in the case of funds under the sponsorship of companies owned by it, without charge.

Security

Pension Corporation is backed by large blue chip financial services companies, including The Royal Bank of Scotland, HBOS and Swiss Re. Its Board and management include a number of expert and highly experienced insurance industry executives, including Sir Mark Weinberg, co-founder of St James’s Place Wealth Management Group, John Coomber, former Chief Executive of Swiss Re, Sir Martin Jacomb, former Chairman of the Prudential Assurance Group, Bob Scott, former Group Chief Executive of Aviva and John Fitzpatrick, former Chief Financial Officer of Swiss Re. Pension Corporation has almost £5 billion of pension assets under its stewardship.

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Mortgage debt in Britain passed £1trn for the first time in June 2006 – a year after total personal debt had broken through the same barrier. But that wasn’t the only record broken that year.

Though the fanfare was more muted, it was also the year the UK government’s estimated net public sector pension liabilities surpassed £1trn. The problem is that while mortgage debt is supported by £3.6trn in property, public sector pension liabilities are backed by a somewhat lesser amount – zero in most cases, to be precise.

A lucky few, such as the Local Government Pension Scheme and the Universities Superannuation Scheme, are actually funded. But well over 3 million public sector workers today are dependent on a tenuous promise for their retirement income.

The government’s predicament mirrors that of those suffering from the credit crunch. There are few savings. Little has been invested. Today’s pensions are mostly paid as they arise through current resources and annual salary contributions from public sector employees and their employers – most of whom are likely to be unaware their contributions are not being saved for the future. Consequently, the £19.3bn contributed is insufficient to meet the current cost of pensions and has to be supplemented by a £9.6bn annual subsidy from the taxpayer.

The numbers are only set to grow further. Unlike the private defined benefit (DB) sector, which has been decimated by its own relatively trifling black hole of £200bn, public sector DB schemes remain open to new members, recently surpassing the private sector membership, despite employing only one-fifth of the workforce.

Reasonable measures to bring the public sector in line with private sector schemes, such as raising the retirement age from 60 to 65 for existing members and capping the index-linking of pensions, could help reduce the haemorrhaging for now. However, a fear of alienating increasingly vocal unions has meant that generous increases in public sector pay have remained the preferred policy. On average, public sector employees now receive benefits over four times’ more generous than those of their private sector cousins.

The result is an ever-increasing bill for taxpayers, which could cost every household £40,000 over the next few decades, according to the TaxPayers’ Alliance. It’s a politically unacceptable solution and is already financially challenging, with estimations it could add £40bn to the government deficit.

Political will and firm action are necessary if these issues are to be addressed. Most importantly, the government needs to increase transparency in public sector pensions. It is only then that we can truly understand the scale of the challenge and begin debating how to get public sector pensions on a more sustainable footing.

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Pension Insurance Corporation, today announces that it has been selected after an independent and competitive tender process to secure the pension benefits of The UK Can Pension and Assurance Plan (“The UK Can Pension Plan”). Pension Insurance Corporation is part of the Pension Corporation group, a leading provider of pension solutions, and is fully authorised and regulated by the Financial Services Authority.

The UK Can Pension Plan came under the protection of the Pension Protection Fund (“PPF”) in October 2006 with the appointment of administrators to the pension fund’s sponsor, U.K. Can Limited (“UK Can”) and in December 2007, UK Can was liquidated.

Under the agreement with the Trustee of The UK Can Pension Plan, Pension Insurance Corporation will insure specified benefits to which members of the Pension Plan are entitled, at a level which is greater than the pension benefits currently provided by the PPF. In exchange for insuring these benefits, Pension Insurance Corporation has received assets amounting to £42 million.

The transaction brings the aggregate pension assets managed by Pension Insurance Corporation under bulk annuity contracts to more than £550 million. Including sponsored pension funds, Pension Corporation has almost £5 billion of pension assets under its umbrella.

Edmund Truell, Chief Executive of Pension Corporation, commented:

“This agreement with The UK Can Pension Plan emphasises Pension Corporation’s expertise and flexibility in being able to offer a comprehensive set of affordable solutions to defined benefit funds of any financial strength, size or maturity profile. It also demonstrates how we can enhance retirement benefits for members of a pension fund under the protection of the PPF and give each member the reassurance of having their own individual pension policy.”

Paul Jayson, Partner at Barnett Waddingham, Actuary and Administrator to The UK Can Pension Plan, commented:

“We are delighted to have worked closely with Pension Insurance Corporation and the Trustee to find a solution that benefits the UK Can pension plan scheme members. The Trustee selected Pension Insurance Corporation following detailed due diligence by our insurance experts, including a review of the quality and strength of its regulatory capital.”

Chris Martin, Managing Director of Independent Trustee Services and Trustee to The UK Can Pension Plan, commented:

“The majority of members of The UK Can Pension Plan are likely to achieve a far better outcome than they would have anticipated when the PPF assessment period started. It has been a very difficult couple of years for them. We were particularly pleased with Pension Insurance Corporation’s approach of putting members at the forefront of the process. A key factor in the decision of the Trustee to choose Pension Insurance Corporation was its willingness to tailor a solution to make the transition as smooth as possible.”

Enquiries

Pension Corporation
Petra Peliskova
+44 (0)20 7451 6688

FD
Nick Henderson
+44 (0)20 7269 7114

Caroline Parker
+44 (0)20 7269 7295

Christine Wood
+44 (0)20 7269 7253

Barnett Waddingham
Laura Cocker (Edelman)
+44 (0)20 3047 2365

Independent Trustee Services
Chris Martin
+44 (0)20 7528 4889

Isabella Young
+44 (0)20 7895 7820

Notes to Editors

The Pension Corporation group provides the following solutions to defined benefit pension funds:

• Insurance Buy-out
• Longevity Insurance
• Pension Fund Sponsorship
• Asset Liability Management

These solutions enable pension funds to protect their members’ benefits by strengthening and stabilising their financial position, and enable their employers/sponsors to protect themselves against the volatility of their earnings and balance sheet values.

Insurance Buy-out: An insurance policy is issued by Pension Insurance Corporation (“PIC”), which gives the members of the pension fund the security of having their benefits underwritten by a fully FSA-authorised and regulated insurance company and removing the responsibility for the pension fund payments from the balance sheet of the employer/sponsor. PIC can undertake the insurance in respect of all or some classes of the members, according to what the fund can afford, and is able to act quickly and in a flexible way (for example by offering different ways of financing the transaction).

Longevity Insurance: PIC offers a longevity insurance policy, the first of its kind in the world, to protect pension funds and their employer/sponsor against the cost of pensioners living longer than expected. The policy is tailored to the member-by-member profile of the fund so as to provide comprehensive “whole of life” protection against what is perhaps the most significant risk faced by pension funds and their employers/sponsors. Inflation risk can be included or covered separately by an inflation swap.

Pension Fund Sponsorship: Typically used where a fund cannot afford a pension insurance buy-out immediately, Pension Fund Sponsorship involves the Pension Corporation group becoming the owner of the employer/sponsor of the pension fund. In this way, the fund gains the additional backing of the Pension Corporation Group, while continuing to have the backing of the original sponsor and of the assets of the fund itself. Under this model financial returns to Pension Corporation can only be drawn once the pension fund members’ benefits have been secured, in much the same manner as funds within an insurance company. For each of the three pension schemes where Pension Corporation has acquired the employer/sponsor, it has advocated a reduction in the risk level of the pension fund assets, which shows the conservatism of Pension Corporation’s views on investment management and its emphasis on pensioner security.

Asset Liability Management: Pension Corporation has a highly experienced investment management team, which is able to advise on state-of-the-art asset and liability management. It offers this service on a fee basis or, in the case of funds under the sponsorship of companies owned by it, without charge.

Security

Pension Corporation is backed by large blue chip financial services companies, including The Royal Bank of Scotland, HBOS and Swiss Re. Its Board and management include a number of expert and highly experienced insurance industry executives, including Sir Mark Weinberg, co-founder of St James’s Place Wealth Management Group, John Coomber, former Chief Executive of Swiss Re, Sir Martin Jacomb, former Chairman of the Prudential Assurance Group, Bob Scott, former Group Chief Executive of Aviva and John Fitzpatrick, former Chief Financial Officer of Swiss Re. Pension Corporation has almost £5 billion of pension assets under its stewardship.

About Barnett Waddingham

Barnett Waddingham LLP is the UK’s largest independent firm of actuaries and consultants offering a full range of professional advice on pensions and investments to companies and pension fund trustees in both the private and public sector.

The firm currently has 40 partners and over 400 staff, based in seven locations around the UK (Amersham, Bromsgrove, Cheltenham, Glasgow, Leeds, Liverpool and London).

www.barnett-waddingham.co.uk

About Independent Trustee Services Ltd

Independent Trustee Services Ltd (ITS) was established in February 1991 and provides professional trustee across a broad spectrum of occupational pension schemes. The high quality of ITS's service is derived from the experience of its management team and staff. Board members of ITS each have significant experience in the pensions industry and are recognised by their peers as specialising in their field.

ITS won the Independent Trustee of the Year Award at the Financial Times Business Pensions & Investment Provider Awards 2008.

www.itslimited.org.uk

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Steve Johnson talks to the chairman of Pension Corp, one of the first to exploit the pension buyout market

It should come as little surprise that Sir Mark Weinberg is an expert on longevity. The chairman of Pension Corporation, among other things, Sir Mark is still beavering away enthusiastically at the age of 77.

“I find this very stimulating: it’s working with some very bright people. If you retire you die soon afterwards,” he says, offering his own idiosyncratic take on the nature of longevity.

Pension Corp has led a chameleon’s life in its two years of existence, as well as stirring up its fair share of controversy, and is once again reinventing itself.

Edmund Truell, erstwhile chief executive of the private equity house Duke Street Capital, launched Pension Corp to challenge the long-standing duopoly of the life assurers Legal & General and Prudential in the UK pension buy-out market, where the assets and liabilities of closed defined benefit pension schemes are converted into a series of individual annuity contracts.

Unfortunately, a litany of life assurance luminaries had the same idea at the same time, erasing the attractive margins Pension Corp had been eyeing up.

While continuing to bid for, and lose, these traditional bulk annuity deals, Pension Corp devised a new strategy: that of buying up companies to get at their pension assets, leveraging Mr Truell’s private equity expertise.

In 2007, deals were struck for the pension schemes of Thorn and Thresher, as well as Telent, the rump of the former Marconi engineering empire. This approach was potentially more lucrative: by eschewing the insured buy-out route Pension Corp did not have to maintain the solvency capital required of an insurer. With Citigroup following Pension Corp’s lead, and other institutions signalling their desire to follow suit, the phrase “regulatory arbitrage” sprang to the lips of observers.

But the £400m (€505m, $780m) Telent deal in particular caused a stink: trustees, unions and, most importantly, the pensions regulator were not amused. In November, the regulator appointed its own independent trustees to protect scheme members and the £500m sitting in an escrow account to cover possible scheme shortfalls.

More significantly, the UK government has now given the regulator increased powers to demand higher contributions from “organisations connected or associated with the employer”, if it judges members’ benefits at risk.

In retrospect Sir Mark, an industry veteran who has founded three life assurance companies in his time, admits to errors in the way Pension Corp handled the Telent deal. “We made a mistake: we didn’t go and speak to the regulator. With hindsight we absolutely should have done. The regulator slapped an order on us and I suppose it indirectly resulted in the changes in pension law.”

The regulatory clampdown is widely seen as sounding the death knell for the non-insured buy-out model. One rival, Aleva, threw in the towel following the government ruling.

Sir Mark agrees it may be the death knell, but in a slightly different sense. “The real obstacle for us is the determination of the regulator that we, as the buyer, should not be able to get deeply involved in the investment management of the scheme,” he says.

“Under the trustee model the trustees control the assets. If they get it wrong the company writes out a cheque without having any influence. That is a real, fundamental issue that has started to surface.”

It is this lack of ability of a corporate acquirer to implement an asset liability management strategy – on the insured side of its business Pension Corp typically shifts schemes out of equities and neutralises inflation and interest rate risk – that is the primary deterrent, according to Sir Mark.

“We have not been actively pursuing corporate deals. We will only do them in the future where there are special circumstances, including where a pension fund wants us to help them with investment management.”

Instead Pension Corp has reverted to plan A and started winning traditional bulk annuity business. In June it took over the running of the £72m scheme of the property developer Swan Hill and the £451m fund of Delta, a metals company.

Sir Mark lauds the value of both deals to the sponsors, pointing out that Delta’s share price rose on the deal, despite its additional payment of £49.7m, as “the market recognised that they were getting rid of a risk that added volatility to the earnings”. For Swan Hill, offloading the pension scheme allowed it to separate its UK and Russian businesses.

He claims that demand for such deals has “shot up”, with Pension Corp being asked to quote on £125bn of deals. This increased demand for insured buy-outs has also pushed up prices which, having fallen from a typical 130 per cent of FRS 17 liabilities to 110 per cent as new entrants flooded the market, has stabilised nearer 120 per cent, Sir Mark says.

And, not content with finally getting some insured business under its belt, Pension Corp is reinventing itself once again, this time as a provider of longevity insurance, whereby pension funds pay fixed annual premiums and in return are reimbursed for future costs arising from higher than expected longevity. “We have started talking to really big companies about insuring away all or part of their longevity risk,” says Sir Mark. “These are enquiries rather than clear quotes but no one else is looking at this field. If you are a big FTSE 100 company the one big risk you have got is longevity.”

Sir Mark stresses Pension Corp’s expertise in this field, with John Coomber and John Fitzpatrick, formerly chief executive and chief financial officer respectively of Swiss Re, among his colleagues. And he is confident that a market in longevity risk is about to emerge, with hedge funds keen to trade the nascent asset class.

“We insure longevity and then we lay off the risk with reinsurers, and ultimately investors take it. We are discovering that there is a market for longevity. We think there is going to be tremendous activity,” he enthuses, warming to his task anew.

Pension Corporation

Founded: October 2006 with the incorporation of Pension Insurance Corporation

Pension assets under stewardship: £4.8bn (€6bn, $9.3bn)

Committed capital: £1bn (May 2008)

Investors include: Royal Bank of Scotland, HBOS, Swiss Re and a number of other institutions

Curriculum Vitae – Sir Mark Weinberg

Born: 1931

1961: Founder, Abbey Life Assurance Company

1971: Founder, Hambro Life Assurance (subsequently called Allied Dunbar)

1971: Managing director, Hambro Life Assurance

1984-1990: Chairman, Allied Dunbar and director of BAT

1985-1990: Deputy chairman of Securities and Investment Board

1991: Founder, St James’s Place with Lord Rothschild and Mike Wilson

1991: Chairman (until 2005) and now president, St James’s Place

2006: Chairman, Pension Corporation

2006: Executive chairman Synergy Insurance Services

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The risks associated with longevity are here to stay, and dealing with them as soon as possible will lead to a far better outcome than simply hoping they will disappear in time.

When Jeanne Calment’s lawyer agreed to pay her an annual income worth one-tenth of the value of her flat on the understanding that he would inherit the property on her death, it seemed like a shrewd bargain. Born in France in 1875, Madame Calment was 90 years old at the time and it seemed unlikely she had much longer to go on this particular journey. Unfortunately, bearing testament to perhaps one of the most misjudged investment decisions ever, Jeanne went on to live to the ripe old age of 122, dying only in 1997. Along the way, she also became the oldest rap artist ever, releasing an album at 121, but that is unlikely to have provided much consolation to her poor aforementioned lawyer. By then, he had long since died and his widow was still making the payments.

It’s a situation humourlessly reminiscent of reality for many pension schemes. For individuals, increased longevity is desirable and it is of little surprise, therefore, that society spends a significant percentage of GDP annually on healthcare and medical research to ensure that we all have longer and healthier lives. But, like Madame Calment, living longer can often also create large unanticipated costs and it is clear this is seriously impacting the finances of pension funds and their sponsors.

In a field typified by extremes, the American civil war veterans’ pension fund – one of the earliest – is another case in point. Originally set up during the war to pay pensions to disabled veterans, the scheme was gradually extended to include all veterans and their dependants, making its final payment only in 2004 – nearly 140 years after the war ended. By then, the scheme had cost the US government hundreds of billions in today’s dollars, well exceeding the original cost of the war, and at its peak in the early 1890s, had even constituted over 40% of the annual federal budget.

It’s a stark warning for many pension schemes and their corporate sponsors today. Ever since the German chancellor Otto von Bismarck thought he’d pulled off a politically brilliant move back in 1889 by promising pensions at age 70 when the average German lived to less than 50 years, the continual improvements in life expectancies have rapidly unravelled the best laid pension plans. And today, these lie at the heart of the huge liabilities stalking many schemes.

The problem is particularly acute for defined benefit (DB) schemes, as most of these pensions are indexed to inflation and can also be passed on to spouses. The waters are also muddied further by another fundamental problem – for most schemes, liabilities are calculated insufficiently frequently, using out-of-date longevity assumptions and often presenting a less than prudent valuation of the true costs of delivering pensioners full financial security. As people live longer – 15 minutes more for every passing hour, by some estimates – the immediate calculable costs can rise dramatically as outdated assumptions are updated and even more troubling, the current upwards trend shows little sign of levelling off (see chart one).

For their corporate sponsors, the impact is also painful. Though the increased pension fund liabilities are often longer-term than most corporate horizons, they must be carried on the company’s balance sheet, reducing the net asset value and increasing the financial leverage of the company. Moreover, sponsors will likely have to fund at least part of these unexpected costs, giving them an uncertain command over their own cash flow and reducing future distributions to investors.

In recent times, the area has become all the more important because of increased regulatory scrutiny. The Pensions Regulator is now pushing schemes to adopt more realistic mortality assumptions that reflect the latest scientific evidence – a change that could significantly increase their total liabilities by 3% or more for every added year of life expectancy. For the DB industry as a whole, that equates to an additional cost of £27bn. This also presents additional shorter-term risks for sponsors as they may be ordered by regulators to divert extra cash into the scheme to meet these future liabilities via a contribution notice.

So how are trustees and sponsors to manage this new idiosyncratic risk? It’s hard enough to judge your spouse’s mood an hour from now or market returns over the next few years, without taking on the additional burden of estimating the lifespan of all the scheme members under your responsibility – past, present and future.

The answer today is largely a dark art. The current trend is unlikely to be your friend here – longevity improvements have repeatedly defied the hopeful shackles of successive actuarial models, despite the most Orwellian filtering of data by job, medical history and even postcode. The latest models – even if true – give scant comfort. By 2050, a 65-year-old UK male might live to be between 86 and 97 years old, up from 83 today.

Some have suggested that diseases such as obesity and diabetes – typically associated with a passive lifestyle – could save pension plans. But though the incidence of these has been rising for over 25 years now, people are still living longer today than they were 25 years ago. Moreover, society itself has undergone huge behavioural changes that can make owning the risk of longevity ultimately an unrewarding and financially painful bet. The increasing intolerance towards smokers is just one recent example – it is estimated that 400,000 smokers across England and Wales quit since last year’s ban on smoking in public places went into effect.

However, before we start decrying the imminent demise of the pensions industry, there are options. Like any other risk, these uncertainties can also be managed once understood. Moreover, new developments in the marketplace mean that there are now ways of reducing these risks and in some cases, even removing them altogether.

The key is to have a proactive and realistic approach. The ideal solution for most pension funds is a full insurance buyout of all liabilities to a dedicated insurer. This can improve the situation for pension scheme members as these specialist insurers are tightly regulated, operate within strict investment and asset-liability guidelines, and have to hold capital against any extreme losses. The cautious underlying assumptions used do often necessitate a large premium, though this should be balanced against future increases in liabilities and an uncluttered balance sheet for sponsors thereafter.

Partial buyouts are often more affordable and can allow schemes to phase laying off their risk over time. They can also be very effective at enhancing shareholder value for sponsors. It is worth noting that when Delta announced that it was contributing £50m to facilitate the pension fund’s buyout of its pensioner liabilities, the markets rewarded the company with a 10% rise in its share price on the day.

Yet even where buyout may not be affordable or preferable, other cost-effective options are appearing. For example, new products now allow pension funds to insure only the longevity risk of pensioners directly for the first time ever. Uniquely, these longevity insurance products can be scheme-specific, covering pensioners and their dependants for their entire lifespan. This caps the exposure of the liabilities to future longevity improvements and increases the chances of a buyout further down the line.

Whatever the route taken, the key to managing the longevity of pension liabilities is simple. Like any other risk, it needs to be understood and dealt with. Ignore it and schemes risk retreading the painful steps of Madame Calment’s lawyer.

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PENSIONS WEEK: What do you consider to be the biggest issues in longevity today?

JOHN FITZPATRICK: Who owns the risk of longevity? Of course, we all own our own personal risk, and hope to live a long life, but for the defined benefit (DB) pension plans in this country and the corporations that sponsor those plans, it is a significant financial issue.

PETER ELWIN: From an equity investment perspective, the market risk John is talking about is still very unclear. Most companies are under-reserving for mortality. If you were to do it on an insurance company basis, you would get some very different numbers.

The accounting rules do not force companies to do that, and neither do they force companies to use particularly up-to-date assumptions. The Pensions Regulator has suggested a benchmark equivalent to 89 years – 90% of companies are assuming a lower figure.

PW: Is that a case of pension schemes being overly optimistic about shorter life spans?

ELWIN: In the past, there wasn’t the same sort of rigour applied to mortality reserving. There was a general sense that the ostrich approach to pensions was the right one; if you put your head in the sand and hope things get better, then generally they will – and if you look too hard at the numbers it will all seem so awful and everything will then go wrong. The regulatory framework has changed so much over the last four years that it is forcing companies and trustees to take a much more rigorous view of the right assumption.

STEPHEN RICHARDS: For a very long period of time longevity was ignored or forgotten as an assumption. A good example of that is the FRS 17 disclosure standard. It is over 50 pages of how to go about calculating the pensions deficit, and there is not one single mention of pensioner mortality.

DAVID BLAKE: In the past, the actuaries have been the only people who have been able to determine this mysterious figure. What we have realised over the past decade is that longevity is a stochastic process, not the previous deterministic one that the actuaries have assumed, and there is a dispersion of lifetimes around the ‘best guess’ of future life expectancy. Today’s issues are quantifying longevity risk and getting a market price for it, in the same way that we have got a market price for inflation risk or interest rate risk.

In the short term it might be the private sector, but in the long term, where there is a dearth of investors willing to assume that risk, there may well be a role for the state in helping get a longevity market started. This was one of the Pension Commission’s recommendations, that the government could help kickstart a longevity market in a limited way, having released ‘regulatory capital’ in its own books by increasing the state pension age. The pensions act and the pensions bill have been very absent on that.

PW: Is the stochastic model being used across the market now?

KEVIN MCLAUGHLIN: It is starting to get there. More people are realising this is a big issue and that they somehow need to quantify the risk. Most pension schemes are sitting there with lots of risks, so the common question you hear is, ‘which risks should I look at first and what do these risks look like relative to one another?’ That comparison is where the stochastic trends have become very helpful.

GORDON WOO: RMS came into the business essentially to provide stochastic modelling methods for dealing with catastrophes: natural hazards, terrorism, pandemics, and so on. These methods have essentially overtaken the use of traditional actuarial methods, which had been the industry standard before. In the last few years we have done a lot of work on excess mortality risk.

FITZPATRICK: As a company that takes this risk, we would be very interested if such a model was available today. How close are we to having a forward, science-based model that we could use to tweak assumptions and understand the future paths of longevity?

WOO: Increasingly, we have more information about the impact of diseases and mortality, and what we are trying to do is to model, in a granular fashion, from the individual upwards.

One of the important points about trying to model forward is to take into account developments in treatments.

The actuarial profession has been used to using a rear-view mirror. The kind of modelling that those who work in disaster areas do is forward modelling. The environment changes all the time and one needs to take into account these potential advancements in medicine and factor it into future analysis of longevity.

RICHARDS: You need to be careful about population-based trends and reading across to the implications for DB pension schemes, because there is a tremendous difference between a small select group of lives who have a disproportionate share of the benefits, and the population. A good example is a typical pension scheme, in which about 10% of the members will be receiving 50% of all pensions.

In the UK, there is a strong correlation between obesity and socio-economic groups: social class five has the highest obesity rates, with social class one having the lowest. Social class one is where most of your DB liability is going to be concentrated. A typical scheme will probably have all of its senior management possibly receiving half of all pensions in social class one, with next to nobody in social class five.

ELWIN: I think shareholders have not got to grips with this at all. You can say to them that the people in the pension scheme are 45-year-old joggers who are getting thinner, not fatter, and they are going to live forever, but they find that very hard to price in.

FITZPATRICK: Stephen and Gordon have said we cannot look at population statistics for what will happen in a DB pension fund, but even in the last 28 years obesity has developed dramatically in this country. Yet the improvement statistics show the longevity for 65-year-old males increasing by 1.2% a year, and the females about 0.7% per year. Even in the population statistics you still see an underlying improvement in longevity, and if what you are saying is that it is even more distant to look at the difference between what happens in a fund and the population, it starts to raise questions about some of the products that people are putting forward; population indexes as a way to hedge, for example.

MCLAUGHLIN: There are factors that may slow down longevity improvements, but what you are not factoring in are the things that will keep improving it; the increases in lifestyle, medicine and research. You could look at the statistics showing there are more scientists around today than in the past, and they are all interested in longevity and research.

If you look at the trends of the last 200 years for life expectancy, it has been going up. The only thing that has impacted in a big way has been economic downturns, as happened in Russia, but other than that you would have to envisage people becoming disinterested in life, which would require very bleak circumstances.

PW: What will happen in the UK economy if longevity is not priced accurately?

BLAKE: There is going to be a massive unanticipated transfer of resources to old people, because the state will have to come in and bail out pension funds or insurance companies that haven’t sufficiently reserved. If you’ve got declining fertility, and a younger generation suffering from obesity and dying out sooner rather than later, you are going to have a massive imbalance between the elderly population and the young population of taxpayers, and they are not going to willingly accept the rise in taxes that would be needed to deal with this problem.

RICHARDS: In the short term we will see reduced corporate profits, as money is not available to give to shareholders, but is being used to shore up pension funds.

FITZPATRICK: Some of these older people voluntarily choose, or their economic circumstances will require them to work longer and be productive members of society for a longer period of time, while contributing tax money. Is one of the answers a higher retirement age over time, creeping up as people live longer?

BLAKE: That is the easiest solution to this problem, but it is quite hard in a system with a welfare state where most British men do not enter retirement from a position of work, they enter from a position of disability. Less than half of men aged 60 to 65 are in productive work now. It is slightly higher in ages 55 to 60.

At the same time, you are going to have a ‘them and us’ between public sector and private sector workers. The public sector worker is retiring at 60 on index-linked pensions, guaranteed by the government. That means 20% of the workforce have got 60% of the pension entitlements in this country. There’s the weakening of the DB entitlements of the private sector workers with lower contributions going into the defined contribution (DC) plans, while private sector workers are still having to pay the taxes to bail out the public sector workers. A quarter of council tax payments go towards paying the deficits in local authority pension schemes. This is unsustainable.

ELWIN: We’re beginning to see more and more press stories about MPs pensions, local authority pensions, and unfunded state pension deficits. It will be exacerbated by the fact that you have got that division within private sector companies as well. You have got a whole generation of people joining the workforce who are getting what is fundamentally low quality DC benefits, not because DC is inherently bad, but simply because it is funded at a third or 25% of the level of DB schemes.

You will have people in their 30s working alongside each other, where one guy, who has been there all his life, has 10 years of DB accruals, which are nicely protected, and the other guy who joined the company more recently with the same pay and benefits, except for the pension.

MCLAUGHLIN: We all know the current DB schemes are not going to work – either more money has to go in or they need more risk-based products and longevity protection. We are already talking about the private sector versus the public sector, and now it is very obvious that the public sector have these gold-plated pension funds. We have already seen the emergence of the risk transfer market in both longevity and pension buyouts.

FITZPATRICK: In the private sector it seems we are going towards DC plans. People will still need to have a steady income in retirement, so they will need to have an insurance market that is going to provide annuities to people. Obviously, insurers are going to need to have the science available to be able to ascertain what the probabilities are in a better way. They also need the market of investors willing to buy the risk at some point because of the need to hedge the risk.

ELWIN: There does seem to be a major issue if you get everybody in society on a DC-type structure, where the individuals bear all the risks. For me, I cannot hedge my own longevity, apart from saying ‘I am going to live to 110’, because I do not want to have my fund run out at 108 and be begging on the streets for the last two years of my life. If you have got a pool of people in a DB scheme, you can hedge the average.

BLAKE: You need better-designed annuities to encourage people away from their aversion to giving up an apparently large lump sum for a seemingly small annuity, which is actually quite fairly priced. We have a lot of behavioural problems to overcome in getting people to recognise the value of annuities. The current design of DC pension plans is very poor. It does not deal with the integrated relationship between an accumulation stage and the decumulation stage.

RICHARDS: The reason annuities look expensive is because people retire too young. If you retire aged 70, an annuity looks like a very good value product in terms of converting your cash into an income, because what you get back looks really good.

FITZPATRICK: The bigger problem is the average person underestimates his own longevity. The surveys indicate people do not believe they are going live as long as they do. They underestimate this by three to six years.

PW: Can you still retire at 70, or are you likely to be out of a job before that?

RICHARDS: We still see people working all the way up to their late 60s. I was doing some work for one pension provider where there was a very clear relationship between later retirement and longevity. I originally thought it was a socio-economic effect – where the better-educated people working with their mind could delay retirement – but even allowing for socio-economic effects through postcode profiling, it was still very clear that those who retired later managed to live longer.

BLAKE: If everyone is going to become part and parcel of solving this problem, companies are going to have to become far more innovative in the way they deal with their elderly workforce, and how they try to keep them active; obviously not in the same stressful jobs that they had when they were much younger, but to find roles for them.

A board member at Prudential has recommended that the private sector could provide annuities up to a certain age, such as 90, and then the state could take over.

ELWIN: The risk is that in 100 years’ time, people will be living to much greater ages and they will look back at a promise like that and think, ‘Fancy imagining that everyone was going to die at 100 – what madness’.

WOO: Japan has the largest number of centenarians and super-centenarians (those who live to 110), but the cost would still be comparatively small. At least it deals with this whole issue of risk, namely that only a small percentage of the population are going to survive to 100, but those who are will have problems no matter how well they have managed their resources in a DC scheme.

BLAKE: The Department for Work and Pensions (DWP) has just issued a risk-sharing consultation document, which only talks about how pension plan members in companies can share risk among themselves. It has nothing to say about the role of the state in hedging aggregate risks, such as longevity risk or inflation risk. We need the private sector to start developing products that can be used to transfer this risk to the final holders of the risk, hedge funds or endowments, or other longer-term investors.

RICHARDS: The government is the biggest ostrich when it comes to this risk. When you look at their own accounting for the costs of public sector pensions, there is a massive underacknowledgment of cost.

PW: What should pension schemes be doing to help themselves out when it comes to this longevity risk?

BLAKE: People need to be looking at designs of instruments that allow this risk to be transferred to the capital markets. There is clearly a role for buyout companies, but ultimately there is not enough shareholder capital in those organisations, because the size of the risk is so large – £800bn in the UK alone.

FITZPATRICK: The investors only want certain things. They like the population index of England and Wales, and yet we have heard the experts here tell us that it is not helpful to a pension fund directly. Investors also like very short durations, such as an index of 10 years, which doesn’t do much for a DB pension plan.

How the system may develop is having the pension insurers underwriting the risk of the individual pension plan. They have actuaries and experts to look at those risks, underwrite them, develop a huge pool and try to get that pool as broadly diversified as possible so that it is relatively close to whatever the population may be. Then they can use some of the tools and techniques that investment banks have been developing, using indices and shorter duration instruments.

BLAKE: You have got duration swaps at 30 or 40 years, and inflation swaps at 30 or 40 years. These are pretty illiquid markets and the spreads are quite narrow. We know that it is possible to go out to these dimensions, but the issue is that longevity risk has only recently been recognised.

FITZPATRICK: It would be helpful if the government issued longer-dated bonds. All pension insurers would be big buyers of long-dated government bonds, and given the fiscal situation of the country, it surprises me that the Treasury is not issuing longer-dated bonds.

MCLAUGHLIN: The risks should be borne by the people with the most capacity to bear them. This is what the new longevity market and the new insurance market is trying to do. On the index-linked products mentioned earlier, one thing about inflation is that, if I buy the correct duration, it is an exact match for my liability. I cannot say the same thing about the index-based longevity products. The index product will probably be very useful for the person in the middle who is aggregating that risk; if somebody aggregates the risk they will end up more like the population and they can start to use this type of product.

BLAKE: The pension funds want 100% hedge protection and 100% hedge effectiveness on whatever risk they are transferring. The capital markets – because they are interested in creating liquidity – cannot give you that perfect match, but you can get 85%-86% hedge effectiveness using capital market instruments and if you get your hedge ratios right. There is a learning exercise here: for a much reduced price, and for the benefit of a lot more liquidity, you can achieve hedge effectiveness up to 85%-86%, but you are not going to get 100% hedge effectiveness because you won’t then get the liquidity with these bespoke solutions.

MCLAUGHLIN: The question then is how does the market develop? Do pension funds go directly to these index-based products, or do they go through an aggregator in the middle? So far, it has been the aggregate in the middle that is doing all the business.

BLAKE: Another issue is the lack of transparency over pricing. First, you do not know whether this is a good deal for investors or not, because there is not a public price for this transfer of risk. Second, it is dependent on the shareholder capacity within insurance companies, which is limited. You are not going to get the £800bn transferred into the markets through that route. The whole point about the capital markets is that you have got pricing transparency.

FITZPATRICK: There are ways for pension funds to determine whether a longevity insurance policy is a good deal or not. They can compare it to a partial buyout of their pensioners in payment; they can calculate the value of keeping 100% of their assets earning in the fund and determine what it is worth to them in present value. There is no doubt they can value it today versus keeping the risk.

PW: Do buyouts represent value for money?

RICHARDS: The reason a lot of buyout prices seem expensive to scheme trustees is because their starting point is under-reserved. There is a relatively small gap between the extra cost of regulation in a life company and the fair cost of the liabilities being taken on. The rest of the gap is because they are under-reserving for the liability in the scheme in the first place.

FITZPATRICK: When you say reserving, Steven, you really mean that the accounting rules do not reflect the economic reality of the liability. Peter, you have written about this extensively, and the Accounting Standards Board (ASB) came out with a proposal recently on moving the accounting assumptions more towards economic reality. Where does that stand?

ELWIN: In the long grass!

BLAKE: What about the pressure in Europe to have Solvency II applied to British pension plans?

ELWIN: That is part of the thicket it has all gone into. There are two slow trains running: one is Solvency II, and there is a big political dispute about that. Some governments and organisations are lobbying for it and some against, including the British government.

One of the reasons why the DWP is saying it is tightening the regulatory framework is as a sop to Europe to say that we have got a tight regulatory framework and don’t need Solvency II. The accounting train is that the ASB in the UK proposed various things, including using a much lower discount rate to evaluate pension liabilities in accounts, which would get you more towards the insurance company view. That was a think piece that has not been adopted by the international ASB, which ultimately sets standards for the UK. They have not got that proposal on their agenda at all, and no prospect of it coming on in the next five years.

MCLAUGHLIN: For me, accounting is not the issue, it is the reserving and cash you hold aside. You can run a pension fund in deficit for a number of years, you do not have to put the full cost in – in fact, you do not have to put the risk-related cost into the pension fund, so who is bearing that risk? It is the system, the company shareholders, the Pension Protection Fund (PPF) and the individual scheme members who would lose out.

There are a lot of pressures from the Pensions Regulator. One way is through strengthened longevity assumptions, and the other is through funding targets. You are starting to see a number of schemes where the gap between insurance-reserving basis and the company-reserving basis is falling away to almost zero. Once you get to that point it becomes a question of whose balance sheet it should be on, the company or the insurers.

If you started from scratch, there’s no way you would design the current funding pension rules that exist in the UK today, because it doesn’t work for the whole system. The funding issue is being solved through the back door. Two or three years ago, pension buyout was very expensive, but that isn’t the case today because of the competition in the market and some new supplies of capital coming through.

ELWIN: An interesting case in point recently was Delta, a small cap engineering company. They bought out a big chunk of their pension scheme, and the share price reacted very positively. There is a growing realisation among institutional investors that if you go through a pension buyout process, you are not necessarily being mugged by a knowledgeable insurance company.

RICHARDS: There are so many competitors in the buyout market, you can go to the market and get 10 quotes for your buyer, and by definition it cannot be overcharging.

BLAKE: You have got a combination of risks being transferred and you do not know the price of the individual ones. I, as an academic, cannot get quotes to do economic research on whether this is good value for money.

RICHARDS: Your average finance director just wants shot of the risks.

ELWIN: He does, which is fair enough. Institutional investors are feeling slightly more confident there is genuine competition in the buyout market and you’re not being ripped off, but it is still very difficult to look at a company that hasn’t yet done it. I spend a lot of my time trying to estimate the real economic value of the liability for a particular company and what it would cost the company and shareholders to get shot of the risk.

Then you can start trying to do some cost benefit analysis, but it is almost impossible for two reasons. One, because the accounting is still fairly shot to pieces, and two, although there is now a competitive market, each deal is a ‘behind closed doors’ transaction, often with confidentiality agreements. You often cannot even find out who came second in the auction, let alone what they were bidding and how close it was from the winning bid.

RICHARDS: I advised one scheme that was able to get 21 quotes for a buyout price; that is proof of a competitive market.

BLAKE: You can have a very competitive market with just two players, and you can have a very uncompetitive market with 100 players. It all depends on what is going on underneath.

MCLAUGHLIN: One thing that worries me about the situation is the regulator coming out with very firm views on longevity, and stating that you have to move noncore plus a floor for no particular reason, other than they think that seems to be a sensible answer today. We all know what has happened in longevity, and what is a sensible answer today will not be in a few years’ time.

The best thing the regulator can do is stand back and let the market develop. If we end up having everybody focused on this one trigger, then you may have 20 firms bidding, knowing that the pension funds have to reserve against the regulator’s basis.

BLAKE: When the swaps market started, the spreads were very wide, but that information was recorded and in the public domain. Over time, as competition got more intense, those spreads came right down. That is the beauty of the capital markets. We don’t have anything like that here at the moment.

MCLAUGHLIN: It will happen; it has to happen. If I was a large company I’m not sure I would want to transfer my risk to an insurance balance sheet that has huge risk exposure itself. The trustees might not be very happy with that. The aggregators will be the ones that have most incentive to deal with the investors, because the pressures will be on them sooner than on a company-sponsored pension fund.

PW: How do you see the UK pensions markets developing over the next 10 years?

MCLAUGHLIN: The private sector is very focused on pensions as an issue. They have had a lot of pain over the last 10 or 15 years; they are really getting to grips with it, and there is a huge desire to lock down risk.

There are also a lot of pressures from accounting, the regulator and funding, and in the backdrop you have got two-thirds of DB schemes closed. The only thing that causes me concern is around the longevity point, and whether a capital market solution will develop. Maybe there is also inflation risk, especially if the government will not issue more long-dated index-linked debt, but again, there are lots of good reasons why it should not.

FITZPATRICK: The surveys show that somewhere around 62% of DB pension plans will get rid of this risk in the next 10 years. The pension insurers will take the risk on, and from there, they will have the motivation to figure out how to manage this risk and hedge it in the way that the insurance industry has successfully managed. The investors will come in and will need a lot of yield, because there is not enough data and transactions. Later, those market spreads will come down, and the pension insurance companies will issue the securities, and we will have a system that starts to make it possible.

ELWIN: The risk, from a societal point of view, is that private companies are taking their own steps to derisk their balance sheets. We made the comment that somewhere between 60% and 80% of schemes are closed to new entrants. As soon as you close a scheme to new entrants, you automatically create a scheme that is turning itself into a much harder-edged liability.

Through staff churn alone, over a five-year term you will turn the 30% of actives in your scheme into 5%. As soon as you have done that, it ceases to be the HR issue you thought it was originally, and becomes more of an ‘arm’s length’ debt relationship, with some seriously toxic characteristics.

FITZPATRICK: We are finding that as M&A transactions come up, the buyer will not take the DB pension liability. The seller realises that he is trying to get maximum value for his core business, and usually there is a trade where a pension insurance company can come in and take the pension liability, and the buyer and seller will figure out how to share whatever cost that might be. The Delta case is very interesting, as they had to put £50m into the plan in order to get rid of the risk of their pensioners in payment, of £450m. It caused the market price of their stock to go up by 10% on the day and it had been rising before that, such that some of this became self-financing, one would argue.

WOO: Were you surprised by this change to the Delta share price?

ELWIN: Yes, based on historic precedent, if a company did that two or three years ago the share price would go down, because investors would feel there was value going away from them to somebody else for no good reason.

More recently, we have seen transactions like Rank, which bought out the whole scheme with the Goldman Sachs insurance company, and the share price reaction was broadly neutral. Delta was probably the first one where you saw a positive share price move, which could probably be attributed to the pension deal. We may see more of those, but it is almost impossible to predict.

RICHARDS: We will continue to see nasty surprises from corporate pension schemes over the next decade. There have been many over the last few years, and that is going to continue.

ELWIN: You have to go through a much more painful process in the UK to get shot of your scheme and to put it on to the PPF than you do in the US. In the US you can go into Chapter 11 and hand it over and then resurrect yourself. In the UK, you have essentially got to become insolvent, and that is a much heavier burden for shareholders to bear.

FITZPATRICK: The real issue is that the last solvent pension fund will have to pay the entire levy for whatever is in the PPF. That will not be a sustainable situation.

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The only function of economic forecasting, the late American economist J K Galbraith once noted, was to make astrology look respectable. And knowingly or not, it is a belief endemic to the private equity industry.

The overriding concern is to find companies with hidden value – whether on their balance sheet or in their intellectual property – and extract it in the most efficient way possible. Every risk is carefully studied and where possible, mitigated. Lines of credit are negotiated at known terms to suit the investor’s horizon. Capital structures are redrawn to maximise efficiency. Balance sheets are scrutinised line by line and operations are streamlined.

There is no obsession within the industry with predicting GDP or any agonising over the evolution of the labour market. These are nebulous questions for economic forecasters to ponder. For the seasoned private equity veteran the wider economy only matters insofar as it determines when the deal is done and when it is exited.

Yet hidden among that otherwise well-managed balance sheet there might be unconstrained liabilities that threaten to undo the most meticulous business plan and expose private equity firms to a whole host of unknown risks – all housed within an often overlooked defined-benefit pension plan.

Though their relationship in the past has resembled awkward teenagers staring mutely across the dance floor, private equity firms and pension funds can no longer choose to shyly look away. Their horizons may be very different – years versus decades – but increasingly, pension schemes are a growing factor in private equity transactions. A potentially attractive deal may come unstuck because of the pension fund or worse still, an existing investment may hit difficulties as the full cost of the pension obligation becomes known. The difficult takeover of retailer Boots and the recent troubles at music publisher EMI are but the most visible tip of the proverbial iceberg.

Any views on interest rates over the next five years? Your debt financing may have excellent terms and it may seem a moot point, but the pension fund’s liabilities will swing violently and perhaps for the worse over the next few decades with whatever the prevailing interest rates are.

How about inflation – any thoughts on how it might evolve over the next decade or even the next half century? Many scheme members will likely have index-linked pensions and the burden of payments can quickly become onerous. Figures from the Office of National Statistics show that from 1970 to 2007, annual employer contributions into pension schemes went up a factor of 53 times, and trebled over the last seven years alone.

And what about people living longer? The latest estimates suggest longevity is increasing at the rate of more than a day a week. Nobody minds postponing that inevitable shuffle off the mortal coil but for every year that pensioners live longer, the scheme’s liabilities increase by some 3%.

It is a complex basket of risks and in the short term, changing economic and demographic perceptions can materially alter the valuation of a pension scheme’s liabilities from one day to the next. Even the assets are not immune as many UK pension schemes have over half their assets in equities. This year alone, Aon Consulting estimated that sharp falls in the FTSE caused UK pension deficits to rise by £15bn in a single day in January, and again by £9bn the following morning. In just one week, UK pension schemes lost £40bn, wiping out all the gains made in 2007.

It is a growing headache for many private equity firms, for whom such risks often lie far from familiar territory and who are charged with looking after a broad church of stakeholders, not just pensioners. As the corporate sponsor, they generally have an obligation to fund these unexpected growing costs and the waters are muddied further by sometimes out-of-date actuarial assumptions that can present a less than prudent valuation of the true costs of fully funding the pension scheme’s liabilities. The impact can go far beyond the immediate cashflow hit, filtering through to the profit and loss, lowering profits, increasing the liability on the balance sheet, reducing the net asset value,