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P A T E R N O S T E R

Reducing risk in corporate pensions Myles Pink, Paternoster. Faculty of Actuaries 6 December 2006. P A T E R N O S T E R. Pensions Regulator. Securing pension promises “safe haven”. Increasing disclosure obligations. Pension Protection Fund.

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P A T E R N O S T E R

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  1. Reducing risk in corporate pensions Myles Pink, Paternoster Faculty of Actuaries 6 December 2006 P A T E R N O S T E R

  2. Pensions Regulator Securing pension promises“safe haven” Increasing disclosure obligations Pension Protection Fund Employee / union pressures Company directors Defined benefit pension plan Pension fund trustees Concerns about “unsecured creditor” status Improving longevity Drivers of change in the defined benefit pension buy-out market Deficit volatility

  3. 1997: Gordon Brown removes tax relief on dividends OPB is replaced by OPRA MFR introduced 2005: The Pensions Regulator replaces OPRA 1988: Nigel Lawson taxes surpluses under SSAP24 How did we get here? 8000 6000 4000 2006: SSF and PPF introduced 2001: FRS 17 disclosures introduced 2000 1990s: Contribution holidays 0 1985 1989 1993 1997 2001 2005 2006

  4. 140 18 8 years 2007 1981 1999 1841 The life expectancy revolution 7.00% 6.00% Mortality rate for men aged 65-74 in England&Wales 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 2050 1800

  5. The pace of change has accelerated dramatically 4.0% 3.5% Average annual reduction in mortality rates for men in England & Wales aged 65-74 (smoothed) 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 1855 1885 1915 1945 1975 2005

  6. This is partly due to the emergence of the “cohort effect” In the UK men and women born in the period 1925-45 have experienced more rapid reductions in mortality rates than generations born either before, or after, this period

  7. Deaths from heart disease have reduced dramatically 1.8% 1.6% 1.4% Mortality rate from heart disease for men aged 65-74 in England & Wales 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% 1950 1960 1970 1980 1990 2000

  8. 30% Change in incidence 20% Change in mortality 10% 0% -10% -20% -30% -40% Age 40-49 Age 50-59 Age 60-69 Age 70-79 We are now seeing mortality improvements in cancers not linked to smoking Change in breast cancer incidence and mortality over the period 1992-2003 for females in England & Wales

  9. Projected future improvements for the 1930-34 generation… 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 1972 1982 1992 2002 2012 2022

  10. £-100bn £-42bn £-180bn FTSE 100 FRS17 All UK companies FRS17 All UK companies Buyout cost Increased disclosure requirements Watson Wyatt Deloitte Willetts Deficit for final salary pension plans

  11. True economic cost Pension funds can be managed in deficit Insurance companies must operate in surplus Increased disclosure requirements Pension liabilities Pension regulation Insurance regulation

  12. Pensions regulator PPF SPV Section 75 Changes in pensions regulation Scheme specific funding

  13. 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 Past performance – a growing market 3 2 Bulk annuity market volumes (£bn) 1

  14. 900 800 700 600 500 400 300 200 100 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 Future outlook – an exploding market LIABILITIES £900 billion FRS17 deficit £100 billion Buy-out deficit £300 billion No. OF SCHEMES 10,000 No OF MEMBERS 15 million Bulk Annuity Market Volumes (£bn) 2007+

  15. Paternoster’s proposition Traditionalbuyout Low risk Risk transfer with profit share Partial/progressiverisk transfer ALM Asset returnoptimisation Managingdeficits High risk Increasedcontributions No action Low funding High funding

  16. Cash payment (net of tax relief) Assets Scheme Sponsoring Company 100% of benefits Members become annuitants of Paternoster A pension scheme buy-out Paternoster Annuitants

  17. Partial/ progressive risk transfer A scheme can be naturally split into the liability cash flows payable to its pensioners and those to its deferred members…

  18. Partial/ progressive risk transfer It is also possible to completely remove the liability cash flows of a scheme for a period of time…

  19. Increased benefits for former Scheme members £ Y m £ Z m £ X m Paternoster Escrow account Sponsoring Company Payment of benefits +cash commutations Annuitants Risk transfer with profit share £ X m + £ Y m + £ Z m = Total available cash for commuted pensions

  20. P A T E R N O S T E R

  21. Trustees and Pensions Regulator approval Employees informed Scheme closed Assets plus premium paid to Paternoster Derivatives overlay Liabilities assumed by Paternoster Employer triggers termination Group policy issued Escrow established “On risk” events Contracts novated “Exchange for physicals” Data transfer “clean up” Escrow release Trustees wind up scheme Trustees sign deed of termination The DB scheme risk transfer process Buy-out price and structure agreed

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