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, increasing leverage and ultimately, impacting the exit price.

The area is also coming under increased regulatory scrutiny, with the Pensions Regulator set to gain stronger powers to issue contribution notices and to take into account the resources of the whole group of companies when judging where funding should come from.

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

The key is to have a proactive and realistic approach to the risks being carried on the balance sheet. Sponsors need to engage with trustees actively and walk that fine line between the investors’ expectations and the funding needs for the pension scheme.

The ideal solution for most is a full insurance buyout, where the pension liabilities are transferred away to dedicated specialists. This can often 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.

It also helps troubled sponsors: securing pension liabilities away from balance sheets improves their ability to raise finance and removes the situation where, in a falling equity market with a commensurate fall in the valuation of a scheme’s assets, a sponsor looking to invest in the business might also find trustees coming cap in hand. Above all, it enables management to get on with running the business, free from the peripheral distractions of administering a pension scheme.

However, insurance buyout valuations use more cautious longevity assumptions and paint a truer picture of the hidden arrears, increasing the liabilities and the premium required significantly. It is simply unaffordable for many companies.

But there are alternatives. Schemes can execute partial buyouts for some of their liabilities, such as current pensioners. If that overshoots the budget and the deficit is still too large, there are now innovative corporate solutions to help transfer risk, ranging from taking on the entire scheme and its myriad of liabilities to specific solutions for specific risks.

For example, trustees and sponsors can implement bond or swap-based hedging strategies to nullify the impact of interest rates and inflation on their liabilities and thereby, on the balance sheet. They can outsource the holistic management of assets and liabilities to a third-party fiduciary manager, which will manage them on a real-time basis. There is even a growing market in longevity swaps, allowing people to hedge this idiosyncratic risk.

It is a rapidly evolving environment and with new solutions appearing fast, private equity sponsors can be hopeful of finding innovative ways of managing these new risks on their horizon.

Most importantly, they can go back to finding and building businesses – not reading horoscopes.

Looking into the crystal ball: forecasting life expectancy can be merely educated guesswork

For those who watch life from the sidelines, increased longevity is a good thing. But living longer also costs more and its impact on the finances of pension funds and their sponsors can be crippling, write Andrew Lloyd and Amarendra Swarup

In a field typified by extremes, the American Civil War veterans’ pension fund – one of the earliest – is a 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 dependents, making its final payment in 2004 – nearly 140 years after the war ended.

The poster child for this longevity was Alberta Stewart, who in 1927 aged 21, married an 81-year-old veteran. Although her husband died soon afterwards, Alberta carried on drawing her widow’s pension right to the grand old age of 98. 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 more than 40% of the annual federal budget.

It is a stark warning for many pension schemes and their corporate sponsors today. Ever since the German Chancellor Otto von Bismarck thought he had pulled a fast one in 1889 by promising pensions at 70 when the average German lived to less than 50 years, the continual improvements in life expectancies have rapidly unravelled the best laid of pension plans and now lie at the heart of the huge liabilities stalking many schemes.

The problem is particularly acute for defined-benefit schemes, as most of these pensions are index linked and can also be passed on to spouses. As people live longer – 15 minutes more for every passing hour, by some estimates – the immediate calculable costs can rise substantially as outdated assumptions are updated and the upwards trend shows little sign of levelling off.

For corporate sponsors, the impact is doubly painful – there is an expectation that they will likely have to fund at least part of these unexpected costs, reducing their profitability and any distributions to investors; and the increased pension fund liabilities must also be carried on the company’s balance sheet, reducing the net asset value and increasing financial leverage.

While the liabilities are often longer term than most investment horizons, private equity firms are particularly vulnerable as the uncertain command a company may have over its own cashflow can significantly impact any potential mergers and acquisitions transactions and even cause a good investment to rapidly turn sour as the true cost of the pension obligations starts to emerge.

In recent times, the area has become all the more topical because of the increased regulatory scrutiny in the area. The Pensions Regulator is pushing schemes to adopt tougher mortality assumptions – a change that could significantly increase their total liabilities by 3% or more for every added year of life expectancy. For the private equity industry, this presents additional shorter-term risks as they may be ordered by regulators to divert extra cash into the scheme to meet these future liabilities or even investigated.

So how is an investor to manage this new idiosyncratic risk and cope with the additional burden of judging the lifespan of personnel – past, present and future?

The answer is 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.

However, there are ways of removing these risks. The gold-plated solution is a full insurance buyout of all liabilities to a dedicated insurer – often expensive but to be measured against future liabilities and a now uncluttered balance sheet. In the recently announced buyout of steel products group Delta, the pensioner liabilities of £450m (€569m) represented an effectively leveraged investment in longevity for the company, which had a rather more modest £200m market cap – a point not lost on the markets, which rewarded Delta with a 10% rise in its share price the following morning.

And other cost-effective options are appearing. For example, a product recently introduced by Pension Corporation allows pension funds to hedge their longevity risk directly, thereby removing the risk that liabilities and funding requirements will go up with future longevity improvements.

Whatever the route taken, with the problem of actuarial uncertainties removed, investors no longer have to stay glued to the crystal ball fretting about the tenacity of their pensioners’ joie de vivre.

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Pension Corporation, a leading provider of pension solutions, is delighted to announce that John Coomber is to join the management team as Executive Vice Chairman.

Mr Coomber was CEO of Swiss Re. During his tenure, he built Swiss Re into the largest life reinsurance company in the world. He is a Non-executive Director of Swiss Re, which is a Pension Corporation shareholder. Mr Coomber qualified as an actuary in 1974.

In his role, Mr Coomber will be responsible specifically for managing the day-to-day operations and finances of Pension Insurance Corporation alongside Edmund Truell, Chief Executive Officer of Pension Corporation.

Pension Corporation provides insurance buy-out, pension fund sponsorship, longevity insurance and other risk transfer and asset liability management solutions. Pension Insurance Corporation is a fully authorised insurance company regulated by the FSA.

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

“I am delighted to welcome John Coomber to the management team of Pension Corporation. John brings unparalleled experience from running a worldwide life reinsurance company which will be vital to Pension Corporation as we develop our business to achieve our goal of being the leading underwriter of pension risks.”

Sir Mark Weinberg, Chairman of Pension Corporation, said:

“As an internationally recognised leader of the insurance industry, John’s unrivalled experience will contribute strongly to Pension Corporation’s strategy. As this market increases in size and importance, John will be pivotal in ensuring Pension Corporation remains at the forefront of industry innovation.”

John Coomber commented on his new role:

“Pension Corporation brings an extremely innovative approach to the traditional pension buyout arena. The group’s evolution requires the management and growth of our dedicated and specialist team as we provide ways to transfer risk away from pension funds and I am looking forward to this new challenge.”

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, and Bob Scott, former Group Chief Executive of Aviva. Pension Corporation has a total of £4.75 billion of pension assets under its stewardship.

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Dear Sir / Madam,

Pension Corporation is the umbrella brand for Pension Insurance Corporation Limited, Pension Corporation Investments and Pension Security Insurance Corporation Limited (“Pension Corporation”) and is pleased to have the opportunity to respond to this consultation.

Pension Corporation provides the following solutions to UK 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 assists corporate sponsors by reducing the volatility of the true funding gap between assets and liabilities.

Pension Corporation also has investments in, or owns outright, a number of corporate sponsors of defined benefit pension schemes. It views itself as a “professional sponsor” whose aim is to ensure the schemes‘ investments and liabilities are de-risked and the scheme reaches full funding.

Currently Pension Corporation has over total of £4.7 billion of pensions under its ownership or stewardship.

Executive Summary

• Pension Corporation fully supports the Government‘s aim and the Pensions Regulator‘s objective of protecting the full benefits of members of defined benefit schemes.
• The main risk to defined benefit pension schemes is employer failure.
• There must be a clear recognition by the Pensions Regulator and DWP that a legal duty of care is owed to the corporate sponsor by the Trustees for their actions.
• Innovation is key to bringing in new and improved solutions to the very real issues that face the c. £1 trillion of UK defined benefit scheme liabilities that remain outstanding.
• The proposed changes are neither proportionate nor necessary to deal with the potential risk.
• Any changes to regulation should be by way of primary legislation.

Introduction

Currently, every risk a pension scheme takes, such as investment risk, is ultimately borne by the sponsor of the scheme. The only risk the scheme bears is the risk of sponsor insolvency. Neither Government nor Regulators are able to prevent such risks crystallising as highlighted in the cases of Northern Rock and MG Rover.

Inappropriate decisions by trustees, increasingly influenced by the views of the Pensions Regulator, can have a major impact on the continued solvency of the sponsor company. There must therefore be a clear recognition by the Pensions Regulator and Government that a legal duty of care is owed by the Trustees to the corporate sponsor, for their actions.

New Business Models and innovation

We applaud the Government‘s stated intent not to stifle innovation and development in this market.

Innovation is key to bringing in new and improved solutions to the very real issues that face the c. £1 trillion of UK defined benefit scheme liabilities that remain outstanding. For example, some of the major factors that may have a significantly detrimental effect on pensions, such as inflation risk, can now be hedged away using liquid financial markets that did not exist ten years ago. This has allowed the risk of inflation to be controlled by pension schemes, providing greater security of payment for scheme members and greater certainty as to the scheme costs for the employer.

Pension Corporation is at the forefront of developing products to reduce risk in today‘s UK pensions market. Our longevity insurance is an example of a product which allows the longevity risk inherent in pension schemes to be limited. Again, this assists in de-risking the pension scheme for the benefit of both scheme members and corporate sponsors. We believe that the Government and the Pensions Regulator should encourage this type of innovation.

Pension scheme investment has been the subject of much criticism, not least, because it tends to react slowly to changing markets and thus less able to take advantage of market opportunities. A recent survey by Aon found that when asked to rank the most important or challenging issues facing their scheme in the future, over half (51 per cent.) of trustees stated investment as the most important challenge.

Pension Corporation has specialist Asset and Liability Management skills available to pension schemes, bringing together the latest and best financial thinking and products to manage asset allocation and returns as well as risks and liabilities. Such a service incorporates real-time scheme performance information capability, designed to aid efficient decision-making. The application of these specialist skills to the pensions market and the concomitant improvement in the risk adjusted return expectations should be welcomed by those genuinely interested in securing scheme members‘ benefits.

Abuse by New Business Models

As we have already told the Minister, we are happy to identify ways in which irresponsible market entrants may abuse the “corporate solution” model, which we and others such as Citibank have developed, and to identify ways in which they may be checked.

Having carefully considered the consultation and proposals however, in our view it is too simplistic to say that new business models increase the risk to members and the PPF. As we noted above, the principal risk outside of the pension scheme is in fact the economic risk of the corporate sponsor.

If the Government is concerned that a sponsoring employer could be removed and replaced by an entity with no resources, and indeed in our view this is the most likely method of abuse, we would suggest that this may be dealt with in a different manner than via the amendment of the tried and tested anti-avoidance and clearance system.

For example, a requirement could be introduced that if any sponsoring employer ceases, completely or substantially, to carry on an operating business, then security acceptable to the PPF must be put in place to the level of the self-sufficiency basis or the value of the business, which ever is the lowest. This would provide both members and the PPF with security without placing unnecessary burdens on business.

Making Profits from Pension Schemes

It is, of course, naive to believe it is only the new business models that seek to make a profit from pensions. Pension Buy-out providers have in the past benefited from the lack of competition and been able to make attractive profits. There are also a wide array of advisers; actuaries, lawyers, covenant specialists, pension managers, not to mention independent trustee firms, who all make not just a profit, but a living, from pension schemes and who, of course, take no downside risk.

Business exists to make profit; no profit means no employers and thus no retirement provision in the private sector and no taxes to pay for the public sector.

The suggestion in the consultation seems to be that scheme surplus should not in fact be returned to the sponsor. We note that most scheme rules deal with the distribution of surplus and in view of the fact that the sponsor bears all the investment risk it seems to be only a matter of natural justice that a surplus, if allowed by the rules, returns to the sponsoring employer.

Without the opportunity for any surplus to be returned to the sponsoring employer there is no incentive for sponsors to fund at a level which that may risk surplus being trapped in pension schemes. It is for this very reason, of course, that many pension schemes have established contingent funding vehicles (e.g. escrow accounts) which, whilst belonging to the sponsor, provide additional security to the scheme.

We also note that pension schemes were set up to pay pensions as they fell due and not to purchase annuity policies. The clear push by the Pensions Regulator for pension schemes to buy-out when possible will in fact result in the closure of more defined benefit schemes and reduce the opportunity for other employees to participate in defined benefit pension schemes. In addition, it ignores the potential increases in members‘ benefits from surplus sharing agreements that can be put in place along with an appropriately risk-averse asset and liability management strategy.

Offshore Entities

We note the concerns expressed in the consultation paper about moving the employer or pension scheme to another jurisdiction. We accept that moving the only employer offshore would be detrimental to the pension scheme in that it would no longer be eligible for the Pension Protection Fund.

However, the implication appears to be that offshore operations that may own or be investors in sponsors are somehow less trustworthy than those in the UK. Offshore operations are now standard practice in business for a host of legitimate operational reasons. It is in keeping with the principle of free movement of goods and capital that business should be allowed to conduct its affairs in this way.

Effective financial regulators exist in most of these offshore locations and it is therefore incorrect to imply that all offshore operations are in some way less reputable than the U.K.

In view of the fact that the Pensions Regulator has consistently said its powers will work on overseas entities, and the successful issue of Financial Support Directions to a company based in Bermuda but under US Court jurisdiction, (not to mention the front line protection for members of pension schemes being in fact the trustees, followed by the statutory advisers with whistle-blowing duties), we do not believe further protection in respect of the potential moves overseas is necessary

Pension Scheme Security

Pension Corporation believes that there is a real risk, in the near to medium term, of the catastrophic failure of the corporate sponsors of one or more very large pension schemes as a result of the economic downturn and credit crunch. This would undermine the security of the members of those pension funds and in turn has implications for the Pension Protection Fund.

This potential for catastrophic failure is of course recognised in the PPF‘s levy which now includes provision for such a risk.

Nothing in the current proposals by DWP targets the fundamental structural risks inherent in UK pension schemes.

The Trust Model

The Trust model relies on the willingness of scheme members and employees to give up their time voluntarily and take on the increasingly onerous regulatory burden of running defined benefit pension schemes.

Whilst trustees are required to have sufficient knowledge and understanding to run their schemes, this often means in practice a heavy reliance on professional advisers.

Without wishing to take anything away from the thousands of voluntary trustees, we believe it is time to consider professionalising the trusteeship of the more than £1 trillion of pension funds in order to secure member benefits in full.

Other ways to reduce the risk to both the scheme and employer covenant should be considered. For example:

• pension schemes should be encouraged to use the services of a professional pension sponsor, who employs pensions experts and can advise on managing the risks as well as bear the economic consequences of such advice being wrong;
• the development of best practice where decisions on policy are made at short intervals (which is more practicable as more professional trustees are used) and implemented rapidly, preferably by the use of real-time investment management techniques now available in the market;
• investment adviser advice should be challenged and performance linked fees encouraged;
• small pension schemes should be encouraged to merge with other schemes in order to benefit from economies of scale;
• the historic duty of care of trustees to the sponsoring employer should be clarified and strengthened; and
• the statement of investment principles should be part of Scheme Specific Funding and as such agreed with the sponsoring employer, rather than just consulted upon.

Implementing Pensions Regulation

The Pensions Regulator was introduced following Alan Pickering‘s report “A simpler way to better pensions” published in 2002 and the Government‘s White Paper “Simplicity, Security and Choice”.

The Pickering report spoke of a new principles based legislation, “We envisage that the level of regulations would be kept to a minimum” with a “small number of codes of practice/guidance” but saying “care would need to be taken that the Codes did not become legislation through the back door.”

Life is always more complex than theory and, in the event, there have been over 50 sets of regulations impacting occupational pensions schemes since the Pensions Act 2004 was passed and 11 Codes of Practice, supported by over 25 guidance documents; making it difficult to argue that the Codes have not become legislation by the back door.

On the 6 July 2004 when introducing the then Pensions Bill to the House of Lords Baroness Hollis said;
“The [Better Regulation] task force has also recommended that regulators should, whenever and wherever possible, adhere to the principles of better regulation. Regulators should be accountable, proportionate, targeted, consistent and transparent in their approach to regulation. I am sure that noble Lords will want to measure our proposals by those five standards. We intend that the Pensions Regulator will embed these principles in its design, working processes and overall approach to the effective regulation of pension schemes.”

Pension Corporation fully supports the Government‘s aim and the Pension Regulator‘s objective of protecting the full benefits of members of defined benefit pension schemes. In order to encourage sponsors and others to contribute to this process, the principles of better regulation, set out above, need to be seen to be working and to be enforced by DWP intervention if necessary. We believe that only in this way can all parties be certain they understand when the Pensions Regulator will act and why, and that they will be treated fairly and consistently, and can make long-term plans accordingly.

• We encourage the DWP to use this opportunity to provide such a framework by:
• embedding the Better Regulation Principles within the statutory framework of the Pensions Regulator;
• allowing an immediate appeal from a Determination to the High Court;
• requiring the Pensions Regulator to publish its policy on exercising its powers; and
• requiring the Pensions Regulator to publish a Regulatory Impact Assessment when it proposes new codes or guidance.

The Proposed Amendments to Pensions Regulation

We question whether the proposed amendments to pensions regulation are truly justified when, thus far to our knowledge, no such abusive business models have been identified.

We have serious concerns over the proposal to change the “intent” test to one of “effect” when the Pensions Regulator is issuing a Contribution Notice. This change, effectively to one of strict liability, combined with the weaknesses in process identified above, will mean an increase in Clearance applications and a reduction in investment in corporate sponsors of defined benefit schemes.

The argument that it is hard for the Pensions Regulator to prove intent is not in our view a convincing one. There is a plethora of jurisprudence on the test of intent as it has been successfully used by the criminal courts for hundreds of years. The proposal also to remove the defence of acting in good faith as an “unnecessary hurdle” cannot be justified; it is a long-standing legal principle that should not be discarded lightly.

In our view any changes to the anti-avoidance powers, which the Government admitted on their introduction are draconian, should be introduced via primary legislation in order that they can be properly debated and amended by Parliament. It is not satisfactory that restrictions of the wide-ranging changes should be by way of guidance.

These changes are far-reaching and a disproportionate response to a threat that has yet to be specified. They impinge upon a wide range of economic activity in the U.K. and beyond, raise fundamental questions of human rights and the corporate limited liability model that has been at the heart of the U.K.‘s economic success for two centuries and place arbitrary powers in the hands of an unaccountable regulator without proper Parliamentary scrutiny.

The result of this will not in our view lead to safer pensions but instead to less investment in corporate sponsors of defined benefit pension schemes and their subsequent decline and inevitable fall, on the PPF.

Conclusion
There are clear risks to members of defined benefit pension schemes from the employer covenant. The Government, rather than legislating for risks it admits have not yet occurred, should instead legislate to ensure that members are properly protected by professional trustees who understand investment and risk management and who put in place real-time decision making. The Government should welcome professional sponsors for the knowledge and understanding that they can bring to pension schemes and rather than risk stifling innovation, work with us to develop new ways of protecting pension scheme members.

Yours faithfully,

Malcolm Thomson
Partner

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Pension Corporation, a leading provider of pension solutions, today announces that Pension Insurance Corporation (PIC) has been selected to secure specified benefits of the Delta Pension Plan, which is sponsored by Delta plc. Pension Insurance Corporation is fully authorised and regulated by the Financial Services Authority.

In exchange for PIC insuring specified benefits of the Delta Pension Plan, Pension Insurance Corporation will receive assets amounting to £451 million.

The transaction brings assets managed by Pension Insurance Corporation in the defined benefit pension fund buy-out market to more than £500 million. Including sponsored pension funds, Pension Corporation now has more than £4.75 billion of pension assets under its umbrella.

Edmund Truell, Chief Executive of Pension Corporation, commented:

“This announcement with the Delta Pension Plan highlights Pension Corporation’s commitment to providing secure and responsible pension management to defined benefit funds and being the insurance solution of choice for pension fund members. The further development of our insurance buy-out business is another important step in being able to offer a complete range of specialist pension solutions to defined benefit funds of any size or financial strength.”

Todd Atkinson, Chief Executive of Delta plc, commented:

“We are delighted to reach agreement on a transaction with Pension Insurance Corporation that provides a cost effective solution for the benefit of plan participants and Delta plc.”

David Pearce, Chairman of the Trustee, Delta Pension Plan, commented:

“We are very pleased that we have been able to provide additional security for all members of the Delta Pension Plan through additional financial support from Delta plc and an insurance transaction with Pension Insurance Corporation.”

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

Delta Pension Plan Smithfield (on behalf of trustees)
John Antcliffe
+44 (0)20 7360 4900

Lucinda Kemeny
+44 (0)20 7260 4900
+44 (0)7958 924 188

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, and Bob Scott, former Group Chief Executive of Aviva. Pension Corporation has a total of £4.75 billion of pension assets under its stewardship.

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Pension Corporation, a leading provider of pension solutions, today announces that Pension Insurance Corporation has been selected to secure the pension benefits of members of Swan Hill Pension Scheme, sponsored by Raven Mount Plc. The agreement marks Pension Insurance Corporation’s entry into the defined benefit fund buy-out market. Pension Insurance Corporation is regulated by the Financial Services Authority.

Under the transaction, Swan Hill Pension Scheme’s assets and liabilities will be transferred to Pension Insurance Corporation in a transaction totalling £72 million. Scheme assets of £65 million are being topped up with an immediate £2 million contribution from Raven Mount Plc and a further £5 million contribution on a one-year deferred basis.

Sir Mark Weinberg, Chairman of Pension Corporation, commented:

“As Chairman of the Board of Pension Corporation, I am delighted that Raven Mount has chosen Pension Insurance Corporation to secure the pension benefits of members of the Swan Hill pension fund. We have already worked successfully with Raven Mount and the Swan Hill trustees to identify a solution that best meets their needs and we look forward to building on this collaboration to ensure a seamless transfer and smooth administration for the Swan Hill fund’s members.”

Edmund Truell, Chief Executive of Pension Corporation, said:

“Pension Corporation, backed by major financial institutions with nearly £1 billion of capital committed by shareholders, is dedicated to providing responsible pension management to defined benefit pension funds. We are proud to be entrusted with protecting the pension benefits of Swan Hill Pension Scheme, whose members can now rest assured that their pension savings and retirement incomes will be secure in the hands of Pension Insurance Corporation”.

Mark Kirkland, Group Finance Director of Raven Group plc, commented:

“I am delighted that the Trustees have chosen to secure our pension commitments with Pension Insurance Corporation. Throughout the process Pension Insurance Corporation has provided creative solutions to allow the company to transfer the risk at the earliest opportunity and give maximum certainty on its contribution. Pension Insurance Corporation has been flexible in working with us to structure the transfer in a way that optimises benefits for the company and members.”

James Hyslop, Chairman of Swan Hill Pension Scheme Trustees, said:

“The Trustees are very pleased to be able to announce that we have secured our members’ benefits with Pension Insurance Corporation. Along with the security provided by an FSA-authorised insurance company, Pension Insurance Corporation has demonstrated a real focus on looking after our members through its prudent and cautious approach to managing pension scheme assets and liabilities.”

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 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 authorized and FSA-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 immediately afford a pension insurance buy-out, 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, and Bob Scott, former Group Chief Executive of Aviva. Its shareholders have committed nearly £1 billion of equity, giving it the capacity to take on up to £25 billion of liabilities. The total of pension funds sponsored to date by companies under the Pension Corporation umbrella amounts to £4.3 billion.

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Pension Corporation, a leading provider of pension solutions, today announces the launch of a new insurance product to protect defined benefit pension funds and their sponsors against the cost of pensioners living longer than expected. The comprehensive cover is offered by Pension Insurance Corporation, a fully authorised insurance company regulated by the FSA, and is the first of its kind to be provided to pension funds anywhere in the world. Pension Insurance Corporation is a wholly owned subsidiary of the Pension Corporation group.

Pension Insurance Corporation’s longevity insurance policy will reimburse pension funds for the cost of any future pension payments that arise from pensioners living longer than expected. In return for this protection pension funds will pay fixed annual premiums set at the inception of the policy. The comprehensive policy will remain in force until the death of a pension fund’s last covered pensioner or their dependant, such as a spouse.

Pension Corporation developed the longevity insurance product in recognition of the fact that life expectancy, or longevity, is increasing in the UK. Sixty-five-year-old British men can today expect to live 4.5 years and women 3.2 years longer than they did in 1980. This trend is accelerating and currently male life expectancy is increasing by one year every five years. The rate of improvement in male longevity continues to increase faster than for women.

It is estimated that an improvement in life expectancy by one year increases the liabilities of the average fund by more than 3.5%. Improving longevity means pensioners draw their benefits for longer and this increases pension fund liabilities.

The longevity insurance product differs from other products in the market because:

• It is an insurance policy from a fully FSA-regulated insurance company; it is not a derivative instrument
• The policy covers the specific longevity risk of the pension fund, rather than the longevity risk of the population at large, as in an index product
• The policy covers the pension fund for “whole of life,” until the death of a pension fund’s last covered pensioner or their dependant; as compared to products that provide cover for only ten years
• The policy requires no upfront payment, so 100% of the pension fund’s assets remain fully invested and earning returns for the fund

The policy should appeal to large pension funds that have no plans for buyout or those that plan to buyout in the future and want to retain 100% of their assets in the pension fund. Longevity insurance will benefit these funds by:

• Eliminating the most significant long-term risk, that of pensioners living longer
• Mitigating the cost of more conservative longevity assumptions that may be required in the future
• Facilitating a future insurance buy-out where the payments to pensioners are certain

Sir Mark Weinberg, Chairman of Pension Corporation, commented:

“Pension Corporation is in business to create solutions for pension funds that protect members’ benefits by mitigating the significant risks they bear. We are pleased to offer an insurance product from Pension Insurance Corporation that comprehensively covers the specific risk of longevity. Pension Insurance Corporation has the capacity and expertise to insure longevity risk now. Our approach will be to work closely with a pension fund, its trustees and advisers to tailor solutions that are appropriate to a fund’s longevity profile and presented in a clear policy.”

John Fitzpatrick, Partner of Pension Corporation and Director of Pension Insurance Corporation, said:

“Comprehensive longevity insurance will protect pension funds against the risk of their pensioners living longer, providing cover for the lifetime of pensioners and their dependants. We are confident our team’s extensive experience of developing insurance risk transfer products backed by a fully regulated insurance company will prove compelling to those pension funds and corporate sponsors. We look forward to working with trustees, advisers and sponsors on this truly ground-breaking protection to the pension industry.”

Enquiries

Pension Corporation
John Fitzpatrick
+44 (0)20 7451 6597

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

Caroline Parker
+44 (0)20 7269 7295

Notes to Editors

The Pension Corporation group (“Pension Corporation” or “the Group”) provides the following solutions to defined benefit occupational pension schemes:

• Insurance Buy-out;
• Pension Fund Sponsorship;
• Asset Li