Route to Buyout – Preparation is Key MetLife Assurance Limited – A specialist in pension risk management

2 Agenda  Importance of accurate data  Investment strategy pre- and post-bulk annuity transaction  Stakeholder involvement  Additional considerations for partial solutions

3 Record-keeping - the Pensions Regulator view July consultation document stated:  “Poor record keeping can lead to significant additional costs in a number of areas, such as…buy-outs…”  “Poor data can add 5% to the cost of buy-out…”  “If providers judge the records to be sufficiently poor, providers may well decline to quote for the business at all or they may refuse to take any data risk…” December guidance document stated:  “[Buyout is one of the] events that we consider give rise to an urgent need to review record-keeping…When one of these events occurs, we will expect providers and trustees to give high priority to reviewing and cleansing the scheme’s data…”

4 Feasibility study Quotations to shortlist Contracts signed Implementation phase Ongoing administration Buyout roadmap Number of steps to buyout each of which depend on data: Attitude to risk Investment strategy Liability reduction Buyout affordability Data provided Quotations issued Insurers short-listed Due diligence Legal negotiations Benefits specified Data risk allocated Premium payment Record migration Data cleansing Benefit recalculation Balance payment Pension payments Member record administration

5 Why data cleanse?  To provide a better service to members –Regardless of whether buyout occurs in the future or not  To ensure a competitive quote process –Suspected bad data may result in insurers refusing to quote –Insurers may have to make assumptions leading to an inconsistent basis for pricing  To ensure competitive pricing –Inclusion of risk premiums will increase price –Additional data may allow scheme experience to be utilised  To assist implementation and avoid expensive surprises –It has been reported that in previously transacted cases, a significant proportion of member records had errors leading to scheme liabilities being underestimated

6 Investment de-risking strategy Equity Investment Bond Portfolio Typical scheme asset portfolio Mitigates interest rate and inflation risk LDI strategy Mitigates interest rate, inflation and mortality risk LDI strategy + mortality hedge Removes employer covenant, interest rate, inflation, investment and mortality risk in part Partial buy-in or buyout Removes employer covenant, interest rate, inflation, investment and mortality risk in full Full buy-in or buyout Possible de-risking strategies

7 Advantages for buy-in or buyout  Helps protect against market movements –Many trustees who adopted a de-risking strategy are still able to secure benefits despite market volatility  Assists in-specie asset transfers –Many insurers will accept assets as part of the premium payment providing a saving for the trustee in transaction costs  Provides greater certainty of pricing –If the portfolio is transitioned into assets that move roughly in line with pricing then the net price should remain fairly stable

8 Stakeholder involvement  Agree objectives upfront – internal stakeholders need to start talking before the process commences to ensure their objectives are compatible –Trustees: fundamentally the key stakeholder as typically they hold the power to select the insurance partner –Corporate sponsor: especially if additional funding is required to facilitate the insured solution –Trade unions: it may be necessary to involve them upfront to ensure they understand the benefit of an insurance solution to the members  Involve external stakeholders early in the process –The route to buyout in particular will involve others who are critical to the success of the transition but may not be as motivated by the risk issues as the trustees (e.g. administrators, scheme actuaries, investment managers)

9 Facilitate process and decision-making  Stakeholder training  Agree stakeholder objectives –Transaction type –Additional funding –Price tolerance  Establish sub-committee structure to undertake research and selection  Agree delegated authorities

10 Additional considerations in partial solutions  Partial buyout: –Member equality –Discharging GMP liability  Partial buy-in –Reporting and monitoring processes need to be established for accounting and administration –A strategy for residual liabilities and assets needs to be defined

11 Summary  To ensure an efficient, cost effective process preparation is key 1.Undertake a data analysis and agree a data cleansing plan 2.Consider implementation of an investment de-risking strategy 3.Gain agreement on end goal from all stakeholders 4.Put in place a sub-committee structure with appropriate delegated authorities 5.Understand what needs to be considered outside of the traditional transaction process

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