Transferring risk: buy-outs and swaps
Catherine McKenna
9 September 2010
What’s the goal?
The growth of alternatives



                      Method                       Comments
Most risk reducing    Buy out   ...
Longevity swaps and buy-outs – A practical
perspective


   Governance and decision-making
   Trustee and corporate requ...
Governance and decision making




   Sponsor/Trustee dialogue
   Training
   Sub-committee : delegation and reporting ...
Trustee and corporate requirements




   Benefits                                    Drawbacks
                        ...
Managing the key risks




   Collateral
   Paying for the asset – employer covenant and investment risk
   Counterpart...
Organigram 1– longevity risk




                           Counterparty
                                                 ...
Organigram 2– Buy-out: sponsor substitution



    Employer                    Insurance company
                 substitu...
Organigram 3 – Buyout: bulk transfer



                                   Insurance
 Employer                          co...
Other issues




   Legal documentation and amendments
   Investment powers
   Statement of investment principles
   S...
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Transferring risk: buy-outs and swaps

  1. 1. Transferring risk: buy-outs and swaps Catherine McKenna 9 September 2010
  2. 2. What’s the goal?
  3. 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. 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. 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. 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. 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. 8. Organigram 1– longevity risk Counterparty anonymised £ data Bank Collateral managers £ Data Auditor Employer £ Pension Scheme raw data Investment Managers
  9. 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. 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. 11. Other issues  Legal documentation and amendments  Investment powers  Statement of investment principles  Schedule of contributions  Legacy liabilities  Member communication  Confidentiality  Conflict

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