Medical underwriting has slowed slightly this year, according to consultancy JLT, with only four transactions recorded by July. It said this “seems to be a reflection of last year’s merger between the two main players in this area, Just Retirement and Partnership”.
Clive Wellsteed, LCPNormally what you would agree is that there would be a downward-only impact on the premium
The Sony United Kingdom Pension Scheme, with a defined benefit section worth about £644m, agreed a provisional premium of £86.5m with insurer Just for 86 pensioners and dependants with the highest liabilities, known as top-slicing.
“Just are currently collecting medical information from the members covered by the policy, and the administration team are carrying out a data cleansing exercise,” the scheme said.
It added that this information would feed into the calculation for the final premium.
Clive Wellsteed, partner at consultancy LCP, said after the merger of Partnership and Just Retirement, trustees became nervous about medical underwriting because there was little competition.
Just then started offering post-deal medical underwriting, where it competes on a conventional basis first.
“Normally what you would agree is that there would be a downward-only impact on the premium,” he explained.
Just’s website states the insurer tries to “identify whether a potential opportunity for a premium reduction through underwriting exists. To help this decision-making process, our first step is to produce a non-underwritten quotation which would include illustrations of the potential impact of underwriting”.
The discount on a conventional buy-in premium from medical underwriting can vary between zero and 5 per cent, said Wellsteed. The size of the saving will depend partly on the insurer’s base scenario.
“If a trustee board is confident that the membership might have particular health factors and that might relate to the industry that was worked in” medical underwriting can make sense, he said.
“Theoretically it shouldn’t depend on industry, but in practice it gives the insurance company extra evidence.”
Funding level will go up
Wellsteed noted that most buy-ins, either on a top-slicing or conventional basis, result in a better funding level “because pricing is pretty good across the board from insurers”.
If a scheme uses gilt assets to pay the premium, the funding level can improve by 1 to 5 per cent, depending on when the last valuation was carried out. More recent valuations tend to show lower liabilities because life expectancy has not gone up as much as previously anticipated.
He said schemes can do well from post-deal medical underwriting: “Doing it post-transaction – if Just put a competitive conventional price on the table – is quite a clever way of structuring it.”
Whether medically underwritten or conventional, buy-ins require preparation. If there are issues, it is better to flag these to the insurer at the outset to create confidence in the data, advised Elizabeth Sumner, UK group pensions manager at Total UK.
The Total UK scheme concluded a £1.6bn pensioner buy-in with Pension Insurance Corporation in 2014, and is considering a further tranche, likely to go to market late next year.
She said during the preparation for the buy-in, the scheme “identified a number of areas of ambiguity” in its rules, and it was agreed that PIC would price for these. “This enabled us to see what issues were more price sensitive than others.”
Specialist engineering company IMI has completed a pension increase exchange exercise and a buy-in, as trustees become more comfortable with liability management measures.
Schemes should expect to spend some time preparing for a deal, she warned. The lead-in to the Total scheme’s transaction was extended because spouses’ death benefits for the pensioners involved had to be calculated first.
Although buy-in activity overall has not been buoyant so far this year, buy-ins might become more attractive again going forward, said Alison Bostock, director at professional trustee company PTL.
“What gives it greater urgency again is the cash flow matching issue,” she said.
“If your scheme is pretty well funded, you’re not getting deficit contributions and you’ve got no [active] members. you’re in a state of negative cash flow,” Bostock said.
Cash flow negative schemes might therefore want to consider a buy-in, because “the perfect way of matching your cash flows is a buy-in”.
