IN THIS ISSUE p2 Q2 2015 market update p3 Q2 2015 buy-in price monitoring p4 LCP jargon buster: PPF-plus buy-out In this edition we look at: Record volumes of buy-ins and buy-outs in the second quarter 2015 A snapshot of current pension buy-in pricing to help inform decisions on when to approach the market LCP jargon buster: what is a PPF-plus buy-out and when does it make sense? LCP PENSION DE-RISKING QUARTERLY UPDATE Q3 2015 2015 on track to reach “new normal” of £10bn of buy-ins and buy-outs Welcome to LCP’s review of the latest developments in the buy-in, buy-out and longevity swap market De-risking Seminar 20 OCTOBER 2015 Volume of buy-ins and buy-outs from 2007 to H1 2015 Source: Insurance company data 0 2 4 6 8 10 12 14 2007 2008 2009 2010 2011 2012 2013 2014 2015 £ billion H1 H2 This half day session is designed for trustees and corporate representatives from UK defined benefit pension schemes (£500m+ of liabilities). It will provide insight into how the supply of longevity insurance and attractive assets impact on your decision when and how to tackle risk. What we will cover? De-risking strategy Longevity risk removal: the perspective of a global reinsurer Asset sourcing: views from our panel of experts, specialising in sourcing long- dated, low risk assets Introducing our new longevity risk tool Register on the LCP events page
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IN THIS ISSUE
p2 Q2 2015 market update
p3 Q2 2015 buy-in price monitoring
p4 LCP jargon buster: PPF-plus
buy-out
In this edition we look at:
� Record volumes of buy-ins and buy-outs in the second
quarter 2015
� A snapshot of current pension buy-in pricing to help inform
decisions on when to approach the market
� LCP jargon buster: what is a PPF-plus buy-out and when does
it make sense?
LCP PENSION DE-RISKING QUARTERLY UPDATE Q3 2015
2015 on track to reach “new normal” of £10bn of buy-ins and buy-outs
Welcome to LCP’s review of the latest developments in the buy-in, buy-out and longevity swap market
De-risking Seminar20 OCTOBER 2015
Volume of buy-ins and buy-outs from 2007 to H1 2015
When might Trustees compromise a section 75 debt and seek to insure higher than Pension Protection Fund (PPF) benefits with an insurer?
In July, MIRA completed a “PPF-plus” buy-out allowing
the company to continue without the scheme, which
was transferred to an insurer. Such transactions remain
rare (Uniq undertook a similar transaction in 2010)
but can make sense where the sponsor’s underlying
business has value but is severely constrained by the
pension scheme.
What differentiates a PPF-plus buy-out?A PPF-plus buy-out ensures members are better off
than if the scheme had entered the PPF. The benefits
secured with the insurer are lower than full scheme
benefits that members are entitled to, but higher
than those provided by the PPF (ie “PPF-plus”). For
a solvent employer this means that the Trustee is
compromising the full section 75 debt payable to the
scheme by accepting less than full scheme benefits.
If the circumstances support this approach, a PPF-plus
buy-out can be done pre-emptively to remove pension
liabilities at a cost that is lower than the full buy-out
debt, as demonstrated by the recent MIRA transaction.
Why consider a PPF-plus buy-out whilst the sponsor is solvent?A PPF-plus buy-out can be worth considering where a
sponsor’s business is viable but is severely constrained
by the pension scheme. If the most likely outcome is
eventual sponsor insolvency with the scheme entering
the PPF then it is in the scheme’s best interests to
maximise the value that can be realised from the
sponsor.
If the sponsor could secure new investment in the
absence of the pension scheme liabilities then a one-off
negotiated settlement may deliver a better outcome for
members than the status quo.
This typically involves a restructuring of the sponsor
allowing a one-off cash injection to be made to the
scheme in exchange for discharging the sponsor from
further pension obligations.
This could be sufficient to secure benefits above PPF
compensation providing a better outcome than the
scheme entering the PPF. The Pensions Regulator
would typically need to approve the terms of the
agreed arrangement.
This approach was adopted by the MIRA scheme,
providing certainty for members and was considered
to be the best outcome that was realistically achievable
given the size of the pension obligations relative to the
business.
When does a PPF-plus buy-out make sense?
� Where deficit contributions are potentially
unaffordable for the sponsor.
� Where the pension scheme is preventing the
company from raising investment or capital.
� Where eventual insolvency appears otherwise
inevitable.
Such schemes can choose to wait for the position to
improve but this may not be the best outcome for
members. Finding an early solution may unlock more
value for members in the long-term.
What is a PPF-plus buy-out and when does it make sense?
How LCP can help
LCP has been appointed to some of the most high profile PPF-plus buy-outs including those by MIRA and Uniq.
For schemes in similarly difficult circumstances, we can help identify appropriate solutions.
To find out more please call us on +44 (0)20 7432 6644.
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LCP is a firm of financial, actuarial and business consultants, specialising in the areas of pensions, investment,
insurance and business analytics.
The LCP Pensions de-risking quarterly update is based on our current understanding of the subject matter and relevant legislation which
may change in the future. Such changes cannot be foreseen. This document is prepared as a general guide only and should not be taken
as an authoritative statement of the subject matter. No responsibility for loss occasioned to any person acting or refraining from action as
a result of any material in this Update can be accepted by LCP.
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