1. Transferring risk: buy-outs and swaps
Catherine McKenna
9 September 2010

2. What’s the goal?

3. The growth of alternatives
Method Comments
Most risk reducing Buy out Zero risk remains with the scheme
Buy in Insurer credit risk
LDI plus longevity swaps Some investment, inflation and
credit risk
LDI only Longevity risk, plus some
investment, inflation and credit
risk
Longevity only Inflation, credit and security risk,
long term lock in and legal
structure issues
Least risk reducing Traditional pension scheme Longevity, investment, inflation
investment and credit risk

4. Longevity swaps and buy-outs – A practical
perspective
 Governance and decision-making
 Trustee and corporate requirements
 Managing the key risks
 Managing conflict
 Legal structure - organigrams
 Other issues

5. Governance and decision making
 Sponsor/Trustee dialogue
 Training
 Sub-committee : delegation and reporting framework
 Project-management
 Advisers
 Final decision
 Ongoing monitoring/succession planning

6. Trustee and corporate requirements
 Benefits  Drawbacks
 Price:
 Seeking an “exact matching”
asset  Typically costs higher than
 Hedges the risk posed by the
UK funding reserves
group of members in the contract.  Loss of investment freedom:
 Mitigates all risks relating to  Assets transferred to
those members in exchange for insurer, thereby
credit risk on the issuing insurer. eliminating potential future
 Mitigates reliance on the
upside risk
employer covenant  Due diligence to avoid
unexpected data risks
Many synergies but watch for conflict

7. Managing the key risks
 Collateral
 Paying for the asset – employer covenant and investment risk
 Counterparty risk – 50 year deal
 Due diligence
 Data protection
 Contractual issues

8. Organigram 1– longevity risk
Counterparty
anonymised
£ data
Bank Collateral
managers
£ Data Auditor
Employer £ Pension Scheme
raw data
Investment
Managers

9. Organigram 2– Buy-out: sponsor substitution
Employer Insurance company
substitution subsidiary
Section 75 debt
money
Pension Scheme Insurance
company
All risks bulk
annuity policy

10. Organigram 3 – Buyout: bulk transfer
Insurance
Employer company
subsidiary
Bulk transfer
agreement
Pension money
Scheme New Pension Insurance
Bulk transfer scheme company
All risks bulk
annuity policy

11. Other issues
 Legal documentation and amendments
 Investment powers
 Statement of investment principles
 Schedule of contributions
 Legacy liabilities
 Member communication
 Confidentiality
 Conflict