Pension Corporation

Pensions are an increasing issue of concern. Almost every day we see stories on the closure of defined benefit pension schemes, the iniquity of public sector pensions, the outcries against increasing the retirement age and a host of other pensions-related problems.

Yet few commentators get to the heart of the matter: that these individual issues – big as they are – are symptoms of a wider malaise in the provision of pensions in this country.

What we have seen over the past couple of decades is pension risk being reorganised in an ad-hoc, unsystematic fashion, with little regard for the law of unintended consequences. The net effect of this reorganisation is that the long-established system of pooled risk in pensions is being broken down, with pension risk being pushed down on to the unwilling individual.

Today’s occupational pension liabilities, whether unfunded or funded, public sector or private, are bigger than Britain’s GDP. Add in state pensions, projected to be 6% of GDP every year over the next couple of decades, and the scale of the issue is immense.

As society feels the full effects of the ageing of the baby-boomers, increased longevity and the hangover from the recent debt-fuelled economic party, it is possible to see social unrest, such as some European countries have experienced over this issue, and inter-generational dispute. We must therefore act to create a more equitable, efficient and sustainable system, one in which pension risk is distributed across the board and is therefore manageable for all.

A good example of managing risk has been the pension insurance industry. To help maximise returns, pension insurers have been adopting more sophisticated investment techniques than those typically used by many corporate-sponsored pension funds.

The enhanced portfolios they employ seek to match the duration of the pension liabilities, incorporate greater inflation protection and more closely match cashflows with liabilities. These investment techniques include the use of reinsurance, swaps and more sophisticated asset management strategies.

If the move to individual provision continues with increasing numbers of people in defined contribution pensions, how many of them will be able to use these techniques to ensure a comfortable retirement?

Yet it is clearly not right for corporates to bear the pension risk. In many cases the sponsors of final salary schemes have themselves become enmeshed in a web of pension-related problems they are ill-suited to handle.

For example, British companies have been forced to increase by a factor of 30 the money they put into pension funds to plug deficits since the 1970s. In 2000, British companies were putting £9.2bn into their pension schemes; by 2007 that figure was £33.6bn.

There are many companies in the FTSE 100 facing liabilities that far outweigh their current stock market value. The knock-on effects for the balance sheet and cashflow can be significant, potentially lowering profits, increasing leverage and ultimately, impacting their share price. For them, unloading pension risk is the logical solution.

A recent survey showed that three quarters of companies offering defined-benefit schemes were considering ending all future accruals for existing employees. Recent high-profile examples of this include Barclays and Wm Morrison. We could end up in this country with a system where the only benefits that are secured for the long-term are those of public sector workers.

Politicians of all parties must grasp the nettle and start thinking about the pension system today. In my view, it is essential that we have a national debate without pre-set boundaries around the shape of the provision for our old age: where the risks reside and the best solutions for spreading it equitably, efficiently and sustainably.

Without such a debate, taking full account of the role of the state and the interaction between state provision and occupational pensions, future generations will be left with an unmanageable burden – our old age. The answer is a review to create a system of pension provision fit for the modern age. This might well incorporate some of the features which made pension provision in the past so strong. After all, some of the challenges may be new, but the objective is the same. A good place to start is with a national debate.

Pension Corporation, a leading provider of risk management solutions to defined benefit pension funds, has today announced the appointment of Schroders to manage an initial £100 million segregated Global Corporate Bond Portfolio for Pension Insurance Corporation.

Mark Gull, Partner at Pension Corporation, commented:

“Schroders was chosen against strong competition because they not only demonstrated a sound process for managing corporate bonds and a well resourced team but, most importantly, they also clearly understood Pension Insurance Corporation’s goal of securing member benefits for the very long-term, and showed the flexibility to work with us in achieving this.

“Investing in Global Corporate Bonds in a mandate designed in partnership with Schroders, helps to maintain Pension Insurance Corporation’s strong risk discipline and enhances the diversity of its portfolio.”

Paul Forshaw, Schroders Head of Insurance Asset Management, said:

“By using Schroders' state-of-the-art Portfolio Modelling technology alongside our rigorous Credit analytics process, we were able to work with Pension Insurance Corporation to develop a customised investment solution to meet their very specific requirements. We see this as the start of a lasting partnership with Pension Insurance Corporation as we continue to work together to meet the challenges of constantly evolving client requirements and a changing market environment.”

Notes to Editors

For further information, please contact:

Schroders
Estelle Bibby
+44 (0)20 7658 3431

Pension Corporation
Jeremy Apfel
+44 (0)7966 138481

About Schroders plc

Schroders is a global asset management company with £103.1 billion (EUR 111.3 billion / $147.7 billion) under management as at 31 March 2009. Our clients are major financial institutions including pension funds, banks and insurance companies, local and public authorities, governments, charities, high net worth individuals and retail investors.

We apply our specialist asset management skills in serving the needs of our clients worldwide. With one of the largest networks of offices of any dedicated asset management company and over 250 portfolio managers and analysts covering all the major investment markets, we offer our clients a comprehensive range of products and services.

Further information about Schroders can be found at www.schroders.com or on Schroders Talking Point www.schroders.com/talkingpoint.

Issued by Schroder Investment Management Ltd, which is authorised and regulated by the Financial Services Authority. For regular updates by e-mail please register online at www.schroders.com for our alerting service.

About Pension Corporation

Pension Corporation removes pension risks from the trustees and sponsors of defined benefit pension funds. As a market leader it is the counterparty to risks ranging from full pension insurance buyout to longevity risk insurance, sponsor stewardship and asset-liability management. Established in 2006 by the Truell Charitable Foundation, the Group now provides increased levels of security and stability for fund members through Pension Insurance Corporation Ltd (“PIC”), an FSA authorised and regulated insurance company; and Pension Corporation Investments LP Inc. (“PCI”). For further information please visit www.pensioncorporation.com

Dealing with the current economic crisis and its aftermath will undoubtedly top government’s priority list over the coming decade. This will be closely followed by healthcare policy and reform of the pension system in its totality: public sector, corporate provision, private provision and the basic state pension.

As a first step in this process it is essential that we have a national debate around provision for our old age, specifically looking at the levels of systemic risk, how this is distributed and ultimately who bears the cost.

The current reallocation of the financial burden of pensions among government, businesses and individuals, which at best is unplanned, is significantly affecting the future welfare of large chunks of the population.

If there is no coherent strategy, it will inevitably be the taxpayer of the future, our children and grandchildren, who picks up the tab.

Current liabilities are huge. There is a total of approximately £1 trillion of private defined benefit pension liabilities in the UK. According to one recent report, unfunded public sector pension schemes have an accumulated liability of £1.1 trillion. Add in the state pension, defined contribution, local government and other assorted occupational pension liabilities and these numbers mushroom.

The underlying drivers pushing this issue comprise increased longevity, ongoing ad-hoc regulatory changes, economic crisis and more general societal changes, including the ageing of the baby boomers.

Over the past decade, policymakers in many countries have shifted the longevity risk in future pension provision away from the state and on to firms and individuals.

As firms move away from pension provision, this risk is by default pushed down on to the part of the system least able to deal with it – the individual. It is all but certain that this unplanned move will haunt future generations.

Many corporate sponsors of final salary schemes have pension-related problems. In 2007, British companies were putting £33.6bn into their pension schemes to help plug deficits, so it is hardly surprising that companies are looking to offload pension risk.

We cannot afford to brush this under the carpet, nor can we afford to get it wrong. A national debate is the right place to start.

This Government, or the next, needs to grasp the nettle without any further procrastination.

A new report from Policy Exchange today revealed the true extent of the public sector pension debt, which until now has been kept hidden and out of official figures. The cost of these schemes is much larger even the publicly acknowledged national debt. Taken into account with net public sector debt, this second national debt brings the total the Government owes to £1.854 trillion, or 150 per cent of GDP.

Public Sector Pensions: The UK’s Second National Debt reveals that:

Using the Government’s own calculations, the accumulated liability of unfunded public sector pensions schemes is estimated to be greater than the national debt. If proper financial methods are applied, the true figure is vast - £1.1 trillion, or equivalent to 78% of GDP. (Page 5 & 33)
The cost of servicing the debt each year to pay for these unfunded schemes in now £45.2 billion. Even on the Government’s own figures, in 2005-6, the interest paid on the unfunded liabilities exceeded the interest paid on the National Debt for the first time. (Page 35)
The Government has been using financially indefensible methods to work out its liabilities and how much workers need to contribute to the schemes. (Page 32)
The Treasury has been subsidising pensions promises. The result is that someone who has been in the public sector for their whole career can now leave with a pension higher than the average they received when working. Neither the Treasury nor Parliament explicitly recognise they are paying this subsidy, which accounts in part for the rapid growth in liabilities. When added to the known subsidy, this means each of the five million employees in unfunded schemes receives a pension payment of £5,700 per year. (Page 42)
Younger workers and those on lower salaries are subsidising older workers and high fliers. (Page 18)

Neil Record, author of the report and renowned pensions expert, said:

“The Government has allowed public sector pension liabilities to run out of control, with the Treasury spending contributions received for the next generation’s pensions to the pay the current generation of pensioners. The Government’s accounting for these pensions has been arbitrary and opaque, making it all but impossible to understand.

“Public sector workers deserve security in retirement. But the worry is that in denying the extraordinary generosity of the current schemes, the Government is creating an apartheid, when compared to those of the private sector. This could lead to high quality public pensions being completely abandoned - I want to avoid that.

“The Bank of England has already moved to make its schemes 100% funded. If the Government were to do the same, the changes would be costly – but the reality is this isn’t money that would otherwise have been saved, and we urgently need to bring transparency to the cost of these schemes.”

The report makes a number of recommendations that would make the total costs of public sector pensions much clearer. These include:

For public sector employers that make pension provision for their staff to pay (jointly with employees for contributory schemes) a cash amount each year equivalent to the full market value of the pension benefits (i.e. current service cost) accrued by staff in that year.
For annual cash pension contributions to be used to buy index-linked gilts of sufficient value to fully pay for all pension promises made in that year. The index-linked gilts should be purchased and issued at market prices.
For a new body to be established (the Public Sector Pension Fund or similar) to receive contributions, to buy index-linked gilts, and to pay public sector pensions. The Public Sector Pension Fund should be required to break even, and charge public sector employers and employees accordingly.
For the existing public sector pension liabilities to be ring-fenced by the Treasury and allowed to run off over their remaining life. All outstanding public sector pension obligations should be met in full.
That the new arrangements should begin after a transition period starting from the date these (or similar) proposals become Government policy. This will allow for the establishment of the Public Sector Pension Fund, and for negotiations over the future shape of pay and pension packages.

Notes to Editors:

Net public sector debt was £754.0 billion at the end of April 2009 http://www.statistics.gov.uk/cci/nugget.asp?id=206

A full copy of Public Sector Pensions: The UK’s Second National Debt is attached.

This report was supported by Pension Corporation.

About Pension Corporation

Pension Corporation is committed to helping facilitate a debate around pensions, including public sector pensions, through its own published studies and research, sponsorship of other reports, public debates and other initiatives.

For further information please contact Amy Fisher on 07799 624 594 or amy.fisher@policyexchange.org.uk

Pension Corporation, a leading provider of risk management solutions to defined benefit pension funds, today announces that the Trustees of the Warwick International Group Pension Scheme have agreed a pension insurance buyin agreement, to insure members’ benefits with Pension Insurance Corporation (“PIC”). The transaction relates to retired pensioners only and the liabilities are valued at approximately £57m. PIC will in due course also take over responsibility for the administration of these pensions.

The pension insurance buy-in means that the insurance policy will be held as an asset by the Warwick International Group Pension Scheme and will offset liabilities, bringing greater security to members’ benefits. The pensioners remain members of the Scheme.

A pension insurance buy-in is a key step towards fully de-risking a pension scheme. By reducing the overall level of pension risk and investment volatility faced by a scheme, it allows flexibility for sponsor and trustees to explore other options.

Warwick International is a leading supplier of speciality chemicals, headquartered in the UK with chemical distribution companies throughout the world. Warwick was acquired in August 2008 in a management buyout backed by Close Brothers Private Equity Capital (CBPE Capital LLP).

Pension Insurance Corporation is fully authorised and regulated by the FSA.

Phil Kelsall, as Chair of the Trustees, said:

“We are delighted to have appointed Pension Insurance Corporation as our partner in this insurance buy-in. For us, this is a crucial step in de-risking the Pension Scheme and increases the level of security for our scheme members. We were able to secure the insurance contract at a price within our funding provisions, so this seemed to be particularly good value.”

Steve Williams, Finance Director, Warwick International Group, said:

“We are pleased that the pension scheme Trustees have secured this insurance contract, which we believe represents the best outcome at this point for the members of the pension scheme. It adds a new level of security to members’ benefits by reducing the scheme’s exposure to risk.”

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

“We are delighted to have been able to help the Trustees of Warwick International Group Pension Scheme increase the level of security of members’ benefits. Pension Corporation is clearly in the market to write new business and has the capital to do so. We maintained a conservative investment stance throughout 2007 and 2008 which, together with disciplined pricing, places us in a strong position to work with trustees today to help them achieve their aims. We look forward to further transactions in the near future.”

Notes to Editors:

For further information:

Pension Corporation
Jeremy Apfel
+44 (0)20 7105 2140

Financial Dynamics
Rob Bailhache
+44 (0)20 7269 7200

Nick Henderson
+44 (0)20 7269 7114

Caroline Parker
+44 (0)20 7269 7295

About Pension Corporation

Key points

The economic crisis has highlighted not only weaknesses in financial markets and regulation but also in existing pension systems in many countries. The UK provides a powerful example for this.
Traditionally the British pension system has been characterised by a partnership between public and private sector, with the former providing a safety net for all, while the latter enabled those on average or higher incomes to enjoy a relatively high quality of life in retirement. For the majority of pensioners and pensioner couples, state benefit income was the main source of income in retirement though. Despite this, state pension spending is low relative to that in most other OECD countries.
Even before the crisis, British pension arrangements appeared unstable, with the government introducing reforms to, among other things, boost private pension savings for those on low to medium incomes (Personal Accounts). The key development in the private sector was the closure of defined-benefit (DB) pension schemes, with most employees moved to defined-contribution (DC) schemes instead. This trend was not repeated in the public sector. The UK’s public finances were in relatively good shape.
The crisis has affected all parts of the British pension system. First, unemployment has increased, potentially leaving more people with broken employment records. Second, the net funding position of UK DB pension schemes deteriorated sharply, encouraging the CBI among others to warn that corporate sponsors should not be forced to close the funding gap as this could exacerbate the crisis. Third, the value of assets in DC schemes dropped equally sharply, leaving those close to retirement with substantially reduced wealth. The Bank of England’s decision to lower interest rates and use quantitative easing further penalised savers and those who were considering purchasing an annuity. Fourth, the public finances have deteriorated dramatically, leaving the UK with one of the biggest structural deficits of any developed country. Fifth, in an effort to protect disposable incomes, households have cut back on retirement savings.
The crisis has left all aspects of the British pension system in a weakened state and it is unlikely that it will return to its pre-crisis status once the economy recovers.
The first reason for this is the perilous state of the public finances, with future governments – of whatever hue – required to cut spending and raise taxes to return its finances onto a sustainable path. This could jeopardise the current government’s policy to link the basic state pension to earnings growth by 2012. It could also provide the background to more radical public sector pension reforms.
Equally, the crisis will most likely encourage the remaining corporate sponsors of DB pension schemes to close these down and offer other arrangements to their employees instead. Personal Accounts, which are scheduled to be launched in 2012, could provide a useful benchmark.
There are also question marks over Personal Accounts themselves. When launched, the government believed that individuals would have too much inertia to actively opt out of these accounts. However, with households facing a substantial hike in the tax burden, individuals might conclude that they cannot afford to help the government reduce its debt burden and save for retirement at the same time. As a result many more people than previously expected might opt out, undermining the rationale of the 2006 pension reforms.
The bleak outlook should not only be seen as a challenge but also as an opportunity to create a more efficient and equitable pensions landscape. This would require a new division of responsibilities between the state, business and individuals.

Executive summary

This paper focuses on an issue, which so far has received relatively little attention by policy makers and the media, namely that the economic crisis has highlighted inherent weaknesses in existing pension systems in many countries. Using the example of the UK, the paper argues that the economic crisis will usher in further changes to the future provision of pensions, with the role of the private and public sectors likely to evolve in the years ahead. To support this argument, the paper first presents the pension landscape in the UK prior to the crisis, which was dominated by the closure of defined benefit pension schemes in the private sector and the government’s reform efforts. The paper then describes the impact of the economic crisis from both a macroeconomic and financial perspective on all aspects of the pension system, from the government’s deteriorating public finances to the collapsing funding position of occupational defined-benefit and defined-contribution schemes. The paper concludes by suggesting that the crisis has left the British pension system in a weakened state and that it is unlikely that it will return to its “pre-crisis” status once the economy recovers from the crisis.

Read the full paper here.

The public sector pay structure must be considered alongside public sector pensions, according to a new study published today by Pension Corporation, a leading provider of risk management solutions to defined benefit pension funds.

The study, “Evaluating public and private sector pensions: the importance of sectoral pay differentials”, authored by Dr Frank Eich, Pension Corporation’s Senior Economist, suggests that either public sector employees in areas like London do not realise how generous their pension promise really is, or they discount the full value of the promised pension given scepticism about its delivery.

The study shows that median gross weekly pay in the public sector was 14% higher than in the private sector in 2007/08. Despite this, as public sector pay is relatively unresponsive to market forces there are higher public sector vacancy rates and therefore lower service levels in high cost areas, such as London and the South East. These vacancy rates are not helped by the pension promise.

Frank Eich, Senior Economist at Pension Corporation, commented:

“This study shows that it is difficult to generalise around “gold plated” pensions and better pay in the public sector, because of varying wage differentials by region and skill group. This means that any review of public sector pensions must look at their impact on the labour market and seek to get rid of the distortions that exist there. Pension promises ought to be viewed by all concerned within the context of pay settlements.”

Key facts:

In 2007-08 median gross weekly pay in the public sector stood at £522, 14% higher than the private sector; a similar gap has existed for more than a decade
Median pay for senior private sector workers in London is around 50% higher than for their public sector counterparts
For females, the highest median annual pay in 2008 was in education, which is mainly in the public sector and in which nearly a quarter of females working full-time are employed; hence the aggregate income distribution appears to be relatively generous for females in the public sector
Female median full-time weekly pay in the public sector is nearly a third higher than in the private sector
The banking, finance and insurance industries had the highest proportion of people with a degree or equivalent at 34% in 2007. This was followed closely by public administration, education and health at 31%
Nearly 50% of employees in public administration, education and health were educated to at least A-level standard, a higher proportion than even in banking, finance and insurance
The construction, distribution and transport and communication industries employed the smallest share of people educated to at least A-level standard

Key Findings:

Median pay is higher in the public sector than in the private sector, but using this to assess relative pay levels is misleading : as lower paid jobs are mainly in the private sector; for example 45% of all full-time employed males worked in the manufacturing, transport, and wholesale and retail industries, mostly private sector, in 2007/08
A more meaningful comparison ought to take into account characteristics such as educational attainment, occupation, gender, location and age
Higher median pay does not necessarily imply that public sector employees get a better pay deal during their working lives
Wage differentials between the public and private sector vary across the UK, with the private sector offering relatively more generous wages in low amenity / high cost areas to attract staff. This makes it difficult for the public sector to deliver a similar quality of service nationwide
There is evidence that public sector pay is relatively uncompetitive in the South East, which helps to explain relatively high vacancy rates in the education and health sectors. Significantly, females in the public sector appear to be doing relatively badly, perhaps demonstrating why the NHS in the South East has difficulty attracting and retaining nurses
Reported problems of recruiting and retaining staff in the education and health sectors in parts of the UK suggest that the beneficiaries do not fully realise how generous their pension promise really is
However, it is possible that public sector employees discount the full value of the promised pension given scepticism about its delivery

Edmund Truell, Group Chief Executive of Pension Corporation, said:

“Pension Corporation is committed to leading the debate on public sector pensions, and I am delighted that this study throws light on some of the more complex areas of the subject. The public sector pensions debate which Pension Corporation is sponsoring at the London School of Economics in June will further illuminate this area. I also look forward to future studies on public sector pensions published or sponsored by Pension Corporation.”

About Pension Corporation

Notes to Editors:

For further information:

Pension Corporation
Jeremy Apfel
+44 (0)20 7105 2140

Financial Dynamics
Rob Bailhache
+44 (0)20 7269 7200

Nick Henderson
+44 (0)20 7269 7114

Caroline Parker
+44 (0)20 7269 7295

“Evaluating public and private sector pensions: the importance of sectoral pay differentials” is available for download here.
Pension Corporation, 3rd Pensions Tomorrow seminar, “Public Sector Liability”, London School of Economics, Wednesday 17 June. For further details please contact Jeremy Apfel at apfel@pensioncorporation.com

The level of attention given to pension schemes during a pre-pack insolvency should be raised, Pension Corporation, a leading provider of risk management solutions to defined benefit pension funds, has highlighted in a memorandum to a House of Commons enquiry.

Pension Corporation’s written memorandum was to the House of Commons Business and Enterprise Committee, and is published in its latest report, “The Insolvency Service, Sixth Report of Session 2008-09”.

Whilst the increasingly used pre-packaged administration complies with the Enterprise Act requirement to achieve the best possible results for creditors, the result is often the admission of the pension scheme to the PPF and the reduction of member benefits.

Pension Corporation believes that this is unfair and that if the scheme does not have sufficient assets, equity or debt in the new business could be given to the scheme prior to an insolvency event. At a minimum, a statutory duty to consider securing benefits above PPF levels before an insolvency event should be considered.

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

“In insolvency, pension schemes are usually the largest unsecured creditors and by that point it is generally too late for them to make any significant recoveries from the business.

“Insolvency can be both shocking and frightening for pension fund members, given the likelihood of a resultant reduction in their pension. We believe that it is vital to protect pension fund members during this process. With pre-pack administrations in particular, the level of attention given to pension schemes should be raised and a statutory duty to consider securing benefits above PPF levels before an insolvency event should be considered.”

Notes to Editors:

The text of the submission by Pension Corporation is below
For further information:

Pension Corporation
Jeremy Apfel
+44 (0)20 7105 2140

Financial Dynamics
Rob Bailhache
+44 (0)20 7269 7200

Nick Henderson
+44 (0)20 7269 7114

Caroline Parker
+44 (0)20 7269 7295

About Pension Corporation

Memorandum submitted by Pension Corporation – Page Ev49

Overview

In the current economic environment we are seeing an increasing number of insolvencies and as a result of this, the increasing number of cases of pre-packaged administration.
An increasing number of insolvencies inevitably leads to a rise in the number and size of the pension schemes going into the Pension Protection Fund’s assessment period, without necessarily going into the fund at the end of this process.
This is an uncertain period for scheme members during which they receive lower pensions than those to which they may be entitled, depending on the funding levels in the scheme.
It is vital to protect what is usually the largest unsecured creditor and consider whether the pension scheme debt can be secured above the PPF level, protecting members and reducing the cost for other levy payers.

Pension Corporation and the Market

Pension Corporation is a major participant in the UK pension insurance industry, specialising in pension risk transfer solutions for defined benefit pension funds in the UK. Since its inception, Pension Corporation has developed innovative, affordable solutions for pension schemes and had a 22% market share in 2008.
Pension Corporation underwrites pension risk management solutions for defined benefit pension funds including: Pension insurance buy-outs, Longevity risk insurance, Pension fund stewardship, Asset and Liability Management.
The pension insurance market is a large, fast growing and dynamic market, which exceeded £8 billion in 2008, more than double the business written in 2007. This figure is less than 1% of the potential market of DB pension schemes, which is estimated at £1 trillion.
The market is being driven by increasing numbers of sponsors looking to remove risk from their balance sheets, and Trustees looking to secure their members’ benefits for the very long-term.

Defined Benefit Pensions.

Defined benefit pension funds remain a live and worryingly important issue for many companies.
From a corporate perspective, being a scheme sponsor means maintaining an open-ended commitment for a very long period. This can have dramatic effects on its share price, limit strategic options including refinancing and debt restructuring, and ultimately damage the very security of the commitments it is pledged to maintain.
The security which the members are seeking, by paying into a pension fund, can in some cases act as a corporate straightjacket when companies are looking at takeovers, mergers or other re-structuring.
This can have immediate consequences for the survival of a company. It can also impact adversely the security and level of retirement benefits available to members.
In a recent survey by PWC, 90% of Finance Directors stated that they are concerned about the risks their pension scheme poses to the business; 30% intend to use contingent assets to offer trustees security, while enabling the company to limit cash contributions.
Given the level of concern with which pensions are viewed by many companies, it is not surprising that an insolvency event, with the ability to “dump” the scheme on the PPF, is often seen by struggling companies and their advisors as the only option.
This results in members receiving lower benefits—even if the scheme is funded above the PPF level, during the PPF assessment period only PPF level benefits are paid. It also has a knock-on impact for all other companies with a DB scheme, in that the PPF levy increases.
The PPF levels, for pension scheme members who have not yet reached normal pension age will, on reaching it, receive 90% of their pension, capped at around £28,000.

Pre-packaged Administration and Defined Benefit Pensions

In insolvency, pension schemes are usually the largest unsecured creditors. Unsecured creditors rarely make any recoveries from the business. Members are often shocked and frightened by the insolvency of the scheme sponsor and the resultant reduction in their pension.
This was recognised in the Pensions Act 2004, which established the PPF and gave them the ability to take on the creditors’ rights the scheme has, in order to best protect members and levy payers. However, by the time an insolvency event occurs it is usually too late for the unsecured creditors to make any significant recoveries.
The increasingly used pre-packaged administration, which allows companies to be sold on quickly, gives the insolvency practitioner and the directors of the company time to pre-arrange the value and terms of any sale.
Whilst this complies with the Enterprise Act requirement to achieve the best possible results for creditors, whilst keeping the business as a going concern, the result is often the dumping of the pension scheme on the PPF.
Consideration should be given to making it a statutory requirement that before any insolvency event, consideration should be given to ways to secure the PPF level of benefits other than via sending the scheme to the PPF. For example, if the scheme does not have sufficient assets, equity or debt in the new business (sometimes given to the scheme but only when the scheme enters the PPF assessment period eg Heath Lambert) could be given to the scheme prior to an insolvency event.
The scheme’s assets may then be sufficient to allow the scheme to compromise its debt above the PPF level and purchase an annuity for members.
This would have a number of advantages:
1. There would be no additional calls on the PPF and no resultant levy increases.
2. would not enter the PPF assessment period, members’ benefits would not have to be reduced and the costs associated with this would not fall on the scheme.
3. Members would receive benefits from an FSA regulated insurance company, at least and usually above the PPF level of benefits.
The PPF’s own figures show that 30 schemes which had previously entered into the PPF’s assessment period have now come out of it due, in the main, to their funding levels allowing for greater benefits than those which would be paid under the PPF. The PPF currently has 291 schemes in the assessment period, with a total of 122,622 members.
The PPF assessment process lasts for around two years, during which, irrespective of the actual level of funding in the pension fund, the scheme members have their benefits cut to the levels of the PPF. During this process there is a great deal of anxiety placed on the scheme members as they wait to find out what their levels of benefits are. The administration burden and cost of reducing benefits is also high.
In volatile market conditions when asset valuations are constantly changing, this two year period could mean the scheme missing out on options to secure the members’ benefits for the long term.
The level of attention given to pension schemes during the pre-pack insolvency should be raised and a statutory duty to consider securing benefits above the PPF level before an insolvency event should be imposed.

16 February 2009

London, 27 April, 2009 - Pension Insurance Corporation, a leading provider of risk management solutions to defined benefit pension funds, today announces that it is to insure the Retirement Benefits Scheme of Food from Britain (“FFB”). FFB was a Food Industry Export Promotion Agency, primarily funded by the Department for Environmental Food and Rural Affairs (DEFRA), and is currently being wound up.

The Trustees, working with their advisers, and after a rigorous vetting process of a short-list of several potential providers, selected Pension Insurance Corporation on the basis of its overall capabilities, flexibility and competitive pricing. Pension Insurance Corporation has insured the benefits of around 35,000 pension fund members over the past 12 months.

The Trustees utilised a number of different evalution criteria and were impressed by Pension Insurance Corporation’s strong solvency position and its conservative approach to capital management. The Trustees were advised by Mercer Limited and legal advice was provided by CMS Cameron McKenna LLP.

The relevant current and future pensioners of the scheme will be issued individual insurance policies by Pension Insurance Corporation in due course as part of the winding up of the Scheme.

John Bevington, Chairman of the Trustees, said:

“We sought a provider whom we considered would provide longevity and effective support to our scheme members, whilst also being financially resilient and secure. Pension Insurance Corporation has a strong solvency position, with a current year-end solvency ratio of 232%. It enacts a highly prudent risk policy, assuming that 50% of any spread between the corporate bonds and LIBOR is in respect of expected defaults. We were also impressed with the expertise of the Board and the calibre of the investor partners. Within our short-list, the Pension Insurance Corporation team demonstrated the most comprehensive understanding of all our requirements and we are confident we made the right appointment.”

David Ellis, Principal at Mercer Limited, said:

“The transaction demonstrates that it is still possible to complete a successful bulk annuity deal despite difficult markets. Mercer worked with the Trustees to carry out a competitive tender process and, after considering a number of proposals, the Trustees decided that Pension Insurance Corporation offered the best solution for Scheme members.”

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

“We are pleased to work with the Trustees of the Retirement Benefits Scheme of Food from Britain in order to achieve security and stability for their members’ benefits.”

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

“We are delighted to have concluded our second insurance transaction of 2009 and expect to close others in the near future. In what is clearly a difficult period, Pension Insurance Corporation remains well placed to provide risk transfer solutions to the trustees and sponsors of defined benefit pension funds.”

Notes to Editors:

For further information please contact:

Pension Corporation
Jeremy Apfel
+44 (0)20 7105 2140

Financial Dynamics
Rob Bailhache
+44 (0)20 7269 7200

Nick Henderson
+44 (0)20 7269 7114

About Pension Corporation

David Collinson among panellists who are discussing the longevity swap market, the PPF, security for buy-in contracts, and whether insurers will need to strengthen reserves.

The panel

Chairman: Clive Wellsteed, partner, Lane Clark & Peacock
Wellsteed is a partner on LCP’s buyout advisory team, advising on some of the defining buyouts of 2007. He is a regular conference speaker and commentator on the buyout market, with a decade of industry experience at LCP.

David Collinson, partner, Pension Corporation
Former global head of M&A services at Watson Wyatt, David has 19 years’ experience in actuarial consultancy and transaction services. Collinson became a partner with Watson Wyatt in 1993.

Hugo James, sales development director, bulk annuities, Legal & General
Based in London, James has overall responsibility for Legal & General’s sales in the bulk annuity market. He is focused on helping develop solutions and structures to support larger schemes seeking to de-risk.

Nick Johnson, head of defined benefit risk management, Norwich Union
A qualified actuary, Johnson has headed up NU’s bulk annuity proposition since January 2006. He is currently working with a number of trustee bodies to develop innovative solutions to manage the transition to insured benefits.

Myles Pink, business development director, Paternoster
Pink is responsible for new business generation, negotiation of commercial terms, devising product structures and trustee/adviser relationships at Paternoster. Pink advised on the initial fundraising for Paternoster in early 2006. Before this, he worked in investment banking at Hawkpoint Partners and Goldman Sachs.

Andy Reed, director, defined benefit solutions, Prudential
Reed is a qualified actuary with over 20 years’ experience in the UK insurance industry. Having implemented various significant bulk transactions, Reed is currently responsible for Prudential’s innovation within the DB market.

Margaret Snowdon, operations director, Lucida
Snowdon is a fellow of the Pensions Management Institute and a past vice-president. She is a fellow of The Pensions Advisory Service as well as chairman. Snowdon speaks at industry conferences and is a frequent contributor to pension journals.

WELLSTEED: What is your view on the longevity swap market? Is there the same potential for growth as the market for buyouts and buy-ins?

COLLINSON: Longevity insurance is growing in appeal in 2009 as many pension funds with large deficits calculate that even if markets recover they face several years until a full buyout can be achieved. Given this reality, funds are focusing on ways to reduce unrewarded risks such as longevity providing increased security for members. For those funds that decide they are better off to stay fully invested in financial markets at current values. longevity insurance is attractive as it substantially eliminates a significant long-term risk to a fund. Is there the same potential for growth as the market for buyouts and buy-ins? Based on the level of interest in longevity insurance from pension funds we see this market growing in line with the market for pensioner buy-ins and buyouts.

JAMES: The longevity insurance and swap markets are in the very early stages of their development. While there has been much interest from schemes, companies and their advisers, the only longevity swap transactions have been those made by insurers. That said, it is almost inevitable that schemes will start to transact at some point soon.

Longevity swaps provide additional options for de-risking pension schemes and we encourage their consideration and use, where appropriate. However, as with all products, schemes should consider what risk they actually wish to reduce and how this compares with alternative de-risking options available. For example, a scheme that is only 80% funded and holding more than 50% of its assets in equities may be better advised to reduce its investment volatility before spending significant sums or time on reducing its mortality risk. The impact of the former is likely to outweigh the latter.

JOHNSON: For most pension schemes, we see the longevity swap debate as an interesting intellectual exercise, but one that currently has little real world application. There are a number of practical complications for which we haven’t seen any workable solutions; these include cost effectiveness, difficulties of understanding and documenting exactly what you are getting. However, the main barrier we see is what happens on subsequent buyout. The swap will undoubtedly have an uncertain market value, and little intrinsic in-specie value to an alternative buyout provider, so on entering into a longevity swap arrangement trustees are severely restricting future options. It’s also worth noting that a number of solutions exist for removing or managing longevity risk within a traditional insurance environment. For the vast majority of schemes these should provide a more practical alternative.

PINK: Longevity insurance could be a very attractive derisking option for those trustees and sponsoring employers who might find funding full buyout or buy-in more challenging following recent falls in asset values.

This solution enables trustees to remove the risk of members living longer than anticipated. Benefits to trustees include them being able to manage their scheme funding with more certainty and the risk of a regulatory requirement to increase life expectancy assumptions is removed.

We have submitted a number of quotations for this solution and several schemes are close to finalising a transaction. Longevity insurance represents a useful solution for those schemes wishing to either manage some of the risks in their scheme, or who are working towards full de-risking.

REED: The longevity swap market is yet to be really tried and tested in relation to pension schemes. We continually look to innovate and enhance our range of defined benefit solutions and have therefore assessed longevity swaps in great detail. At this point we do not see how longevity swaps offer most trustees an effective means of de-risking their scheme, compared with other solutions available. Swaps only hedge against part of the scheme risk and yet are very complex, with various legal and contractual complications making them difficult to implement. Therefore, with the exception of some very large schemes, swaps are unlikely to be of benefit to the large majority of trustees.

SNOWDON: There is growing interest in this area as schemes find themselves faced with increasing longevity risk and declining assets. Most schemes would like to buy out, but the reality for many is that their assets today are not readily marketable. This drives trustees to consider ways to reduce the longevity risk while holding on to the assets. Trustees are also familiar with hedging interest rate and investment risks, so hedging longevity risk is not an unfamiliar concept. The downside is finding suitable counterparties and the cost of the solution. Ultimately, buyout, or buy-in, provides full coverage whereas longevity swaps are only covering one of the risks.

WELLSTEED: The current economic downturn is likely to mean more schemes being assessed for possible entry into the Pension Protection Fund. What factors determine whether you are willing to provide buyout quotations to potentially secure higher than PPF benefits? Are you put off by the possibility these schemes may ultimately enter the PPF rather than buy out?

COLLINSON: We are always keen to see whether our competitive pricing and innovative approach can facilitate pension scheme members receiving more benefits than they would otherwise be entitled to if they entered the PPF, as with the pension insurance corporation buy out of the UK Can Pension Plan. Typically this situation arises for pension schemes that are better funded and where the trustees have a determination to find the best possible outcome for their members. We are prepared to invest the time and effort needed to explore possible solutions for scheme members, in the knowledge that for some such schemes entry into the PPF may be the end result.

JAMES: Many of the schemes that have arranged deals with Legal & General over the last 22 years have been unable to afford a full buyout. As a result we are happy to quote for all types of arrangements including those schemes close to entering the PPF as we have a wealth of expertise in this area.

Where there is the possibility the scheme may be transferred to the PPF, there is always a risk that the arrangement will not be completed but we work with scheme trustees and their advisers to understand whether there is a good chance that the scheme benefits will exceed those offered by the PPF. If so, we will generally seek to support the trustees in securing a buyout on the best terms possible, given the value of the scheme’s assets and liabilities.

JOHNSON: For any scheme the decision to quote will depend on a number of factors. The most important one is the ability to price and administer benefits. The second is a clear understanding of the reason the quote is being requested and the decision points leading up to buyout. This is no different for schemes that may enter the PPF, and providing we have a clear understanding of these we will consider quoting. The possibility of entering the PPF is just one of many factors that mean we may not ultimately win a scheme. This only serves to highlight the benefits of a good working relationship between trustees, their advisers and buyout providers.

PINK: When we are asked to provide a quotation we review the scheme against a number of criteria (including, for example, funding level, member profile, investment portfolio, administration records, mortality data etc).

For cases where the corporate sponsor has failed and there is a possibility of the scheme being transferred to the PPF, we also make an initial assessment of the scheme’s funding relative to the PPF funding level. This helps us advise the trustees appropriately before they invest time and resources in reviewing quotations for a solution which might not be viable.

REED: Our key aim is to help schemes meet derisking goals and we will continue to offer quotations to schemes we feel are genuinely looking to transact. We have always assessed each scheme on its own merits and will carefully weigh up the likelihood of each deal proceeding (such as looking at the sponsoring employers financial position and assessing the scheme investment strategy), but we also trust the judgement of EBCs, who play a key role in the completion of any deal. Where there is a risk such schemes could enter the PPF, we would want to be clear about Prudential’s contractual and legal obligations, for example with regards to surrendering the benefits.

SNOWDON: It is true many more schemes are likely to enter the assessment period for PPF, as the strength of covenant of many employers faces rapid decline. This is bad news for scheme members and the PPF, therefore any solution involving the security provided by a UK-regulated insurer will be welcome. Lucida focuses primarily on bespoke solutions for large schemes, but would be willing to quote for schemes where higher than PPF level benefits could be secured by the funds available. Our decision to quote is based on many factors and this is no different from the approach we take to quoting for other schemes.

WELLSTEED: There are many different views on whether trustees should insist on additional security or collateral being provided by insurers for buy-in contracts. What do you think are the most important factors that should be factored into trustee analysis on this issue?

COLLINSON: For the buyout industry as a whole additional security and collateral arrangements introduce additional risks and in the long run will be damaging to pension scheme members’ interests if they result in increased costs and different classes of insurance policyholders. To our knowledge no UK insurer has defaulted on a guaranteed annuity payment and trustees should question whether in reality additional security arrangements represent value for money.

JAMES: Additional security and collateralisation have become the hot topic for larger buy-ins over the last year. As we go through these challenging economic times and we see historically robust institutions struggle or in some cases fail, it is inevitable that trustees and sponsors reconsider the impact of transferring large proportions of their scheme assets to a single counterparty. That said, it is important to consider the wider picture and not simply jump straight to a solution that may either add little or, in the worst case, actually damage a scheme’s position.

JOHNSON: Additional security has without doubt been the number one topic of conversation with all trustees of buy-ins in the post Lehman’s era. In common with all providers, we would previously have argued that additional security was not necessary, providing the trustees choose a well-capitalised, professionally managed and regulated insurance company. However, we now recognise that trustees are making a decision that leaves the scheme, and therefore sponsoring employer, with counterparty risk with a lifespan equal to that of the members insured; this could have a significant financial impact for 20-50 years and as such it is perfectly understandable that trustees ask for additional security.

PINK: The debate over whether trustees should insist on additional security in a buy-in contract is one for both trustees and sponsors to consider in the context of the support that could be required from the corporate covenant if the insurer were to fail to meet its obligations under the contract. Under certain security arrangements, the trustees and sponsor are opting out of the potential advantages and disadvantages of being combined with the risks associated with other policyholders (known as mutuality). Trustees should consider carefully the circumstances in which such arrangements would benefit them (e.g. other risks held by the insurer are mispriced) and those circumstances in which they would benefit equally with other policyholders.

REED: Much has been debated on this matter already. Our view is that while a few (large) schemes may seek additional security in this way, it is not an appropriate step for all schemes to take. One of the key benefits of dealing with a large insurer is the pooling of diversified assets across that business. Once you start segmenting lots of individual pots into ring-fenced funds, the benefits of the pooled financial strength become reduced. Furthermore, additional security comes at extra cost. And not all schemes will be in a position to fund for this. It should be remembered that insurers already have to reserve for higher capital requirements compared to pension schemes and so there is already added security of completing an insured transaction.

SNOWDON: The number of requests for additional security around a transaction is increasing and like some other insurers, we have responded to this need. Collaterisation is already common in the insurer to insurer transfer market (where there is no Financial Services Compensation Scheme protection), but its extension to DB schemes reflects the degree of nervousness felt by trustees about the market generally. Collaterisation could be described as a belt and braces approach as trustees are already well protected both by the reserves held by the insurer and by the FCSC in the unlikely event of insurer failure. Counterparty security is expensive and will generally only be available to the larger schemes.

WELLSTEED: Is it inevitable that insurance companies will need to strengthen their reserves going forward? For example, do you think insurers will be required to increase their assumed rate of defaults on corporate bonds in light of recent market events? How might this impact pricing?

COLLINSON: Insurers need to continuously review their approach to reserving and risk management bearing in mind the responsibility they have for the safety and security of members’ benefits; the increase in credit spreads has put assumptions regarding future defaults into sharp focus. Some insurers, as a response to changing financial conditions, may well increase their contingency reserves for possible future defaults.

JAMES: Over the last few weeks we have seen announcements from a number of the listed insurance companies relating to reserving in the light of current economic conditions. As expected, significant additional reserves, are being put aside by insurers to cover potential future credit losses, which for most will cover them against a credit default scenario worse than any period in history. Insurers will continue to monitor these reserves and, if appropriate, add to them to ensure that they are able to meet their liabilities as they fall due.

Unlike reserving which, in the absence of major events, is typically reviewed on an annual basis, pricing is reviewed on an ongoing basis by insurers. Therefore, the impact of increasing default assumptions has already and will continue to be reflected in the pricing of annuities. No specific rise is likely to follow based on the recent announcements. However, the quantative easing measures starting to be employed by the government are likely to depress yields on gilts and bonds accordingly, which will impact pricing of annuities.

JOHNSON: The events of the last six months have highlighted the need for a dynamic and robust approach to ensure reserving and pricing assumptions adequately reflect changing economic conditions and expectations. The issue of default risk has highlighted this, meaning insurers without a proactive approach are required to make additional allowance in their reserves. Inevitably, where a company is required to increase its reserves it will result in an increase in the cost of writing business, with a corresponding impact on prices. However, it is also true that an approach that more fully identifies and quantifies individual risks provides a more sophisticated pricing model which over the long run should better reflect the actual cost of writing business.

PINK: Whether insurers will need to strengthen reserves for corporate bond defaults will depend on a number of factors, including how prudent their current reserving is and the nature and quality of assets they hold to support liabilities. The prudent approach which many insurers are taking towards default risk is at the level which would have been required to withstand the Great Depression for the entire duration of their portfolio (i.e. 20 years or more).

As insurers increase the capital they hold in respect of the risk of default, then pricing will increase to generate the required return on the capital. The extent of any increase in price will depend on both the extent of any increase in reserving (which is a prudent estimate) and the insurer’s best estimate of actual default.

REED: UK insurers are required to reserve on a prudent basis and should be making appropriate allowance for anticipated defaults on corporate bond assets. Within the UK shareholder annuity funds, Prudential has built up a significant credit reserve of £1.4bn to allow for future defaults. This reserve can withstand the equivalent of the average default experience during the Great Depression occurring every year over the life of the annuity portfolio. We anticipate that the current flight to quality within the bulk annuity market will continue and all providers will be considering their default assumptions carefully.

SNOWDON: Insurers are required to consider current market conditions when assessing default risk and this has led some insurers to strengthen their reserves. Further deterioration in the market could lead to further strengthening. Insurers do allow for default risk in pricing and to the extent that this risk is believed to have increased this would be factored into pricing. However, it is worth noting default assumptions are intended to cover the whole term of bonds and not just the next year or two. So the overall level assumed may not be impacted much by current turbulence.

Pension Corporation (“PC”), a leading provider of risk management solutions to defined benefit pension funds, is pleased to announce that 2008 was a year of considerable achievements, during which the company wrote £1.6 billion of new insurance business, providing security and stability to around 30,000 fund members.

PC is also pleased to announce that its corporate subsidiaries, telent and Quadriga, improved their operational profit performances over the year, making combined EBITDA of £46 million in the year to March 2008.

2008 Insurance Group Highlights

New insurance business of £1.6 billion transacted
Around 30,000 pension fund members insured
Largest ever UK pension insurance buyout with Thorn Pension Fund
Robust solvency – regulatory capital ratio 232% of required minimum
Corporate Bond default assumption equal to 50% of spread over Libor
Averaged over 70% of insurance company assets in cash or gilts during 2008

Edmund Truell, Group Chief Executive, commented: “Pension Corporation is today well placed to capitalise on the progress of the first three years and to be one of the market leaders in the UK pension insurance market, working with trustees and sponsors in the provision of risk transfer solutions that bring safety and security to pension fund members. The principles of pension risk transfer are now well understood. Trustees, their advisers and sponsors widely recognise that pension risks are not comfortable bedfellows with corporate balance sheets.

“Pension Corporation is unusual in its ability to provide combined corporate finance and insurance solutions that are designed to meet our customers’ needs in a safe and secure way. We look forward to building on this very substantial progress in 2009.”

Group Risk Management

PC kept its investable assets highly liquid over most of the year: up until December Pension Insurance Corporation (“PIC”) held over 70% of its assets in either cash, gilts or other liquid instruments. In December, PIC invested a substantial amount in high-grade corporate bonds. PIC had negligible exposures to the Lehman and AIG failures.

PIC takes a conservative view of possible defaults and recovery rates on the corporate bonds it holds. It has only 1% of its assets in equities and real estate. PC takes a ruthless approach to unrewarded risks and it is the Group’s policy to hedge as much inflation, duration, and longevity risk as possible. The Group’s hedging against duration risk has protected it against the fall in interest rates and, as importantly, against the volatility of interest rates. An example of this volatility was seen during the last six weeks of 2008, when the price of long-dated gilts rose over 14%.

The Group has been innovative in its approach to hedging inflation risk, for example investing in index linked bonds and transferring the duration risk to third parties. PIC and its Guernsey reinsurance affiliate, Pension Security Insurance Corporation, are pioneering the hedging of longevity risk.

As well as offering longevity insurance to pension fund clients, in the form of a full risk transfer to cover not only primary pension fund members but also spouses and dependents, the Group has been assiduous in removing longevity risk from its own balance sheet. Some 79% of the longevity risk attributable to pensioners in payment and deferred pensioners over 55 has so far been transferred to third parties and off the PIC balance sheet. These counterparties are highly reputable and well rated. PC enters 2009 without the legacy issues affecting some of its competitors.

Pension Insurance Corporation

On the new business front, five insurance transactions totalling £1.6 billion were written by PIC in 2008. In two of these five cases PIC has been able to increase the pension benefits paid to members. Of particular note is UK Can, where PIC has provided insurance to members whose former sponsor had gone into bankruptcy. This was repeated after the year end with Leyland DAF.

PIC anticipates troubled corporate sponsors to be a major source of opportunity in the coming months and years, with our insurance solutions able to provide a greater level of benefits to pension fund members than they might have otherwise received from the Pension Protection Fund.

PC is proud of its flexibility, being able to offer insurance and corporate solutions. This flexibility was the precursor of its successful closing of the £1.1 billion Thorn pension insurance transaction, the largest corporate buyout in the UK to date.

Following an open, competitive process held by the Thorn Trustee, who had implemented improved asset and liability management, PIC agreed to insure the fund in December 2008. A significant improvement to the pension benefits promised to members was provided, alongside increased security of members’ benefits from a UK FSA authorised insurer.

Pension Corporation Investments

PC has the proven ability, through Pension Corporation Investments (“PCI”), to identify, evaluate and execute complex investment opportunities that include operating companies, supporting relatively large pension fund liabilities and risks.

PC’s major operational asset is telent, the former GEC Marconi. We are pleased to report that the operational business has continued to flourish under PCI’s ownership, with both revenues and profits increasing. The telent management are to be congratulated on the level of new contract wins, reflecting the strong infrastructure and solid technology base of the company. Funding negotiations with the Trustee continue.

Under PC’s stewardship and support for its capable management, Quadriga, Europe’s largest hotel entertainment supplier is improving profits and is cash-generative for the first time in many years. In addition, substantial investment is being made in new technology, to offer high-definition television services to hotel users.

Capital

The substantial achievements of PC were recognised by the admission of JP Morgan into the investor base. As the precursor to a second funding round, JP Morgan invested from its own balance sheet and has subsequently been appointed as placement agent for the forthcoming £400 million second funding round.

JP Morgan subscribed new cash at a premium to the price paid by original investors, reflecting the significant franchise value that has been created by the management team.

Our approach to capital management is very conservative. One area receiving much attention currently in the market is the extent to which insurance companies provide for potential defaults on their corporate bond holdings. We acquired the bulk of our corporate bond portfolio in December 2008 and have few holdings of subordinated financial bonds. Notwithstanding this high quality, we are currently assuming that 50% of any spread between our corporate bonds and Libor is in respect of expected defaults. We believe this approach, which mirrors that now used by the Bank of England, is one of the most conservative assumptions in our industry.

As well as a conservative approach to managing our capital, our solvency position is strong, with a year end solvency ratio of 232%.

Additionally, an embedded value loan programme was initiated with £50 million of capital, secured against the embedded value of PIC. The company expects to be able to tap this source of capital as it expands its business.

This financial strength positions PIC well to build on its 22% UK market share in pension insurance deals in 2008.

Board and Management

Since its establishment by the Truell Charitable Foundation three years ago, PC has expanded its board and management team considerably. The Boards, partners and employees are widely regarded as one of the finest teams in the industry. The Boards, led by Group Chairman Sir Mark Weinberg, ensure the highest standards of governance; whilst the management, led by group CEO Edmund Truell, have pursued a cautious and prudent policy which maximises pension security for fund members, at the same time as building the scale required in this field.

PIC was delighted that John Coomber, former CEO of Swiss Re, stepped up to the role of Executive Vice Chairman to assist in the running of the insurance business in mid-2008. The drive for continuous innovation provides solutions that are tailored to the needs of customers in a rapidly changing world, with increasing numbers of sponsors looking to remove risk from their balance sheets and Trustees looking to secure their members’ benefits for the very long-term. At the same time, constant price discipline within a consistent risk reduction framework has combined to ensure that new business is written on appropriate terms and that the risks taken in assets and liabilities are closely managed.

Notes to Editors:

For further information please contact:

Pension Corporation
Jeremy Apfel
+44 (0)20 7105 2140

Financial Dynamics
Rob Bailhache
+44 (0)20 7269 7200

Nick Henderson
+44 (0)20 7269 7114

Caroline Parker
+44 (0)20 7269 7295

The Leyland DAF transaction was completed in January 2009 and therefore is not included in the 2008 figures
The year end solvency ratio is the amount of Available Capital Resources above the Required Capital
Thorn Pension Fund background
1. In late 2006, Terra Firma Capital Partners, the then private equity owners of Thorn, requested quotes for the pension insurance buy-out of the Thorn Pension Fund.
2. Pension Insurance Corporation was involved in several rounds of insurance bids, lasting almost a year, to the point where it was not economic to transact the insurance deal on its own merits.
3. Drawing on its private equity expertise, a significant competitive advantage, Pension Corporation proposed a transaction encompassing both the Thorn businesses and the pension fund. This was a solution tailored to the specific needs of the client and which also offered significant benefits to the pension fund members.
4. By acquiring Thorn, Pension Corporation assumed stewardship for the Thorn Pension Fund as well as agreeing to acquire Brighthouse, Quadriga and Threshers, other Terra Firma Capital Partners portfolio companies.
5. Within two weeks, Pension Corporation had contracted to sell the operating businesses of Brighthouse and Threshers on to Vision Capital. Quadriga, a market leader in its field, was retained.

About Pension Corporation