Derisking UK Pension Plans - Towers Watson

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Derisking UK Pension Plans - Towers Watson

  1. 1. De-Risking U.K. Pension Plans A OneWorld Presentation March 31, 2011 towerswatson.com© 2011 Towers Watson. All rights reserved.
  2. 2. The changing cost of U.K. pensions £2,500 2000 to now — Large increases in life expectancy as £2,000 new mortality data published £1,500 December 1985 - — April 1997 — Legislation Legislation makes makes indexation to indexation to deferred pensions compulsory £1,000 pensions compulsory 2007 to now — Market turmoil has led to £500 uncertainty and volatility £0 Jan 85 Jan 87 Jan 89 Jan 91 Jan 93 Jan 95 Jan 97 Jan 99 Jan 01 Jan 03 Jan 05 Jan 07 Jan 09 Jan 11 De-risking can help control the costtowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  3. 3. Getting to the end of the road No two pension plans are the same Common themes are that:  Risk matters…  But the price of risk management has to be acceptable…  And any risk taking or management needs to be efficient. For many, it’s about getting to the destination as quickly as possible… Without running out of gas or money!towerswatson.com 3 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  4. 4. Keeping it simple A balance sheet:  Assets $250m (50:50, equity:bonds)  Funding liability $300m (50:50, pensioners:other)  No future accrual  Paying off deficit at $6m a year  Hope that asset returns will pay for a third to a half of deficit Price of buying out $350m Accounting liability similar to fundingtowerswatson.com 4 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  5. 5. Faster, safer (and cheaper?) Faster — cut/remove liabilities at right price  Participants choose to transfer out (ETV)  Pensioners choose more pension now, less later (PIE)  Participants choose lower cost options at retirement (reshaping) Safer — efficient risk taking + more hedging  Reduce risky assets  Reshape risky assets  Reduce interest rate and inflation risk  Reduce longevity risk And no increase in cash spendtowerswatson.com 5 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  6. 6. A liability reduction roadmap Funding Buy Out Asset Deficit Liability Shortfall $m $m $m $m Start 300 250 50 100 PIE (pensioners) 285 250 35 85 PIE (leavers) 275 250 25 75 ETV 260 235 25 70 PIE (statutory) 235 235 0 55 Reshaping 215 215 0 50towerswatson.com 6 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  7. 7. INSERT SECTION TITLE Risk measurement and aspirations Risks Within the Pension 160 140 120 100Units of risk 80 60 Risk budget 40 20 0 Equity Inflation Interest rate Longevity Other Diversification Net risk towerswatson.com 7 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  8. 8. Pension Increase Exchange (PIE) What is it?  A member exchanges an increasing pension for a higher but nonincreasing pension. — Simple example: A member with an increasing pension of £10,000 per year exchanges this for a flat pension of £15,000 per year.  Option can be offered to pensioners as a bulk exercise.  Option can be offered to non-pensioners as an option at retirement. Why do it?  Terms can be set for the exchange that are attractive to the member, but reduce the liabilities in the plan.  Indexation risk (and some longevity risk) has been removed. Who is doing it?  A number of pension plans in the U.K.  We have seen high take-up from members where this has been offered, about 50%. towerswatson.com 8 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  9. 9. Enhanced Transfer Values (ETV) What is it?  A non-pensioner member takes the value of their pension plan benefits to (most likely) a personal or current employer’s defined contribution plan.  The value of the pension will be enhanced by the original plan sponsor to facilitate the transfer. Some of the enhancement may be paid as cash to the member. — Simple example: An ex-employee with 15 years of service and a deferred pension of £12,500 per year receives a transfer payment to their new plan of £180,000, which is enhanced to £200,000, and a payment to the individual of £10,000 in cash. Why do it?  While member take-up is lower than PIE (10% to 25% depending on whether cash is offered), all liability in respect of transferring members is removed.  Take-up is potentially highest among younger members and those with big pensions, for whom pension risk is greatest. Who is doing it?  A number of pension plans in the U.K. towerswatson.com 9 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  10. 10. Pension reshaping What is it?  A member exchanges other elements of their defined benefit pension for elements that are more attractive to them. — Simple example: A member with a pension that provides for a 50% spouse’s pension payable for life exchanges this for a single life pension paid until age 75 and then receives a lump sum. Why do it?  Terms can be set for the exchange that are attractive to the member, but reduce the liabilities in the plan. Who is doing it?  It is relatively new, but new U.K. Minimum Income Requirement (MIR) legislation allows much more flexibility in how pensions are provided. towerswatson.com 10 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  11. 11. Setting a plan Contributions of no more than $6 million per annum Target of exit/equilibrium in 10 years or less able rd Opportunistic buyout if terms merit? fo af nt te ex e 2014 th Annuity purchase in readiness for exit t o r isk 2013 D e- Bonds/derivatives to match liabilities 2012 ETV — liability reduces by $15 million 2011 PIE and reshaping — liability reduces by $70 million 2010 Data cleaningtowerswatson.com 11 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  12. 12. Contact details Tony Broomhead  tony.broomhead@towerswatson.com Mark Duke  mark.duke@towerswatson.com Paul Kitson  paul.kitson@towerswatson.com Jason Richards  jason.richards@towerswatson.com Peter Routledge  peter.routledge@towerswatson.comtowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

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