Prudential: The journey towards risk-free peace of mind – Greg Wenzerul




The market for defined benefit pensions de-risking is growing, with more pension scheme trustees wishing to secure their liabilities with an insurance provider. Prudential's Greg Wenzerul explains how insurers can work with trustees to develop an optimal de-risking strategy, and why a reliable counterparty is essential.

Defined benefit pension schemes have recently faced significant challenges. Once a common component of a corporate remuneration package, such schemes are now widely viewed as expensive and risky for employers. Increasing longevity and lower investment returns mean defined benefit schemes are now increasingly costly, and market volatility has created the added risk of scheme deficits becoming large figures on a company's balance sheet.

Although often seen as a concern by trustees, some risks can be viewed as an opportunity. "Investment risk is a rewarded risk," says Greg Wenzerul, head of defined benefit solutions at Prudential. "Good investment returns can lead to an improved funding position and good management of the assets can reduce volatility. However, longevity and inflation are unrewarded risks, and if they can be mitigated within the insurance industry, they should be."

Trustees and scheme sponsors are therefore seeking attractively and affordably priced solutions that mitigate such risks, and are suited to their needs.

Put risks on lockdown

The ultimate goal for trustees in this position would be to de-risk the scheme entirely, through a buy-in followed by buy-out. In both instances, all the liabilities of a scheme are secured with the insurer. With a buy-out, the insurer pays the members' benefits directly to scheme members and, with a buy-in, the insurance policy remains an asset of the scheme and the trustees responsible for paying members' benefits.

For some businesses, a buy-in or buy-out may seem a distant goal. "For poorly funded schemes, buy-ins may be unsuitable and buy-outs unaffordable - the current focus should be on improving the funding level of the scheme," says Wenzerul. "A solution may incorporate asset liability matching, non-asset insurance de-risking, such as longevity swaps, or incentive exercises, such as enhanced transfer values. However, companies must bear in mind that the actions they take may adversely affect their ability to reach the end goal, or entail cost or complication."

Other schemes, which feel they are further along the route map towards de-risking, will benefit from a calm appraisal of their situation and an understanding of how best they can advance. For such companies, the task is to structure a plan that helps them meet their targets as efficiently and effectively as possible.

"Clearly, market opportunities come and go, and schemes should be ready to take these opportunities when they arise," opines Wenzerul. "Most importantly, schemes need to ensure they have the right governance in place to act quickly, which means agreement between the key decision-makers is required to get the green light for the de-risking transaction. The scheme assets must also be suitable for such transactions."

"At a time when defined benefit pension schemes weigh heavily on the shoulders of many, an insurance provider can free organisations from this burden of worry."

The advantages are palpable. Once the risk has been transferred to the insurance provider, ideally guided by an independent broker, the sponsor is likely to benefit from greater security through less risk, and reduced volatility in their scheme from the perspective of both contributions and accounting.

A strong, long-term counterparty

However, the transaction is not altogether free of risk itself. Trustees and sponsors transferring risk to a counterparty need assurance that this counterparty will be able to maintain its contractual obligations no matter what the financial climate brings. This is very difficult to guarantee.

It is very important that trustees thoroughly assess potential counterparties, particularly the financial strength of the insurer. This includes considering the insurer's ability to be a long-term counterparty and the quality of its risk management processes. Trustees can do this by considering how well insurers have withstood difficult financial and economic conditions in the past.

Counterparty risk can also be mitigated through other means, such as the ring-fencing of assets, but Wenzerul views such options as a second order effect. The most important factors are the financial strength and experience of the counterparty.

"Trustees should be comfortable that the party they are transacting with will be financially stable for the duration of the contract," he explains. "This might be as long as 50 years. There should always be a focus within these transactions on the fact that this is a long-term relationship, not just a relationship at the point of signing." It is of course also critical that the counterparty can and has before executed such contracts in the market.

Trusted, extensive solutions

As a trusted financial services group, established in 1848, Prudential has long evinced its reliability. Prior to the mid-noughties, the market de-risking emphasis was on insolvent pension schemes, whereby trustees looked to secure scheme benefits with an insurance provider. Since then, however, the need for defined benefit pensions de-risking has grown dramatically and Prudential has responded in kind.

As new providers enter the market and the pensions community gains a greater understanding of bulk annuity products, Prudential has switched its point of focus to higher-value transactions. Recent deals have included the UK's first £1bn transaction, with Cable & Wireless, and a £900m GlaxoSmithKline bulk annuity buy-in agreement, plus a number of transactions valued at around £250m.

The company has also looked to extend its range of solutions. Not all schemes are suited to traditional arrangements and Prudential has developed strategies targeted towards a range of needs. Companies can purchase a deferred product, for instance, or structure a buy-in by securing each risk separately.

Having discussed these options with consultants in the field, Prudential would now like to see them filter down through the wider market. While there is a tendency to assume that de-risking is the preserve of well-funded schemes, Prudential is keen to communicate that that is not necessarily the case.

"Although we believe that there are still some improvements to be made in terms of increasing process efficiencies, we want to make companies aware that there are de-risking opportunities for a large range of schemes," says Wenzerul. This broad set of capabilities stems largely from the simplicity of its operations.

"We like to think that a transaction with Prudential, over the course of the contract, will be seamless and almost boring. It won't take up a lot of time for board management or trustees."

"We have a dedicated team dealing with the defined benefit de-risking market," adds Wenzerul, "and we have a streamlined process in place to ensure we can supply information in a simple and speedy manner. We have the experience to provide bespoke solutions very quickly and efficiently."

Seamless transfer

Understanding how and when to transact can be a difficult process, but Prudential maintains an unwavering customer focus both before and after signing the contract.

Its managers meet regularly with the scheme trustees, giving both parties a chance to discuss and resolve any issues that arise. This helps to ensure that the correct benefits are paid from the outset, and continue to be paid throughout the life of the contract.

Striking the deal is just the beginning. There is still a lot of work to be done, in terms of processing and uploading data for instance, and it is imperative that both parties are in regular communication throughout. The onus is on ensuring the customer's long-term satisfaction and freeing up their time so they can better focus on their core business.

"Trustees and companies often have concerns that don't pertain to pensions," says Wenzerul, "so we like to think that a transaction with Prudential, over the course of the contract, will be seamless and almost boring. It won't take up a lot of time for board management or trustees, due to the confidence that those parties have in the security and longevity of Prudential as a counterparty."

As the defined benefit de-risking market develops and the pensions community becomes increasingly au fait with the possibilities on offer, Prudential will continue to innovate and adapt its offerings. At a time when defined benefit pension schemes weigh heavily on the shoulders of many, an insurance provider can free organisations from this burden of worry.

"The last few years have really demonstrated the risks being run by these schemes," concludes Wenzerul, "but transferring risk to an insurer can provide members, trustees, FDs and shareholders with significant peace of mind."

Greg Wenzerul is head of defined benefit solutions at Prudential.