Prudential: Seize the day – Greg Wenzerul and Andrew Reed

In today's volatile pensions market, more and more companies are looking to transfer the risk to insurance providers. With a vast array of available options, including annuity buy-ins and buyouts, Prudential's Andrew Reed and Greg Wenzerul explain why many companies cannot afford to wait to transact.

These are tricky times for defined benefit pension schemes. Faced with the double whammy of increased longevity risk and extreme market volatility, many of them have been plunged into deficit. With ever more schemes closing to new members, the central concern for sponsors and trustees is finding ways to safeguard existing members' interests.

Managing down the risk is therefore seen as essential. "The current climate has really focused trustees' minds on de-risking," says Greg Wenzerul, corporate deal principal at Prudential. "For many trustees, the goal of de-risking their schemes has become a lot more pressing."

The picture, however, is complex, with no two schemes operating in quite the same way, and no one solution suitable for all. While transferring risk to an insurance company may seem like an attractive prospect, it is important that sponsors and trustees remain alert to what this may mean in practice.

Buy-in vs buyout

Two widely discussed options are annuity buy-in and buy-out solutions. Buyouts transfer the pension liabilities from the sponsor company to the insurer, whereas buy-ins entail purchasing an insurance policy that fully matches those liabilities.

"At Prudential, we have been in the annuity buyout market since the mid-90s, with the annuity buy-in market taking off around 2006," explains Wenzerul. "The key difference is that a buy-in is an asset of the scheme. It's similar in many ways to a corporate bond, but instead of coupon payments it pays the actual benefits of the underlying members."

"If you can find a counterparty that you believe is strong and reliable, and they can meet that price, then transact. Don’t wait."

While buy-ins represent the ultimate de-risking solution for many companies, they require the support of the scheme's sponsors and affordability remains a consideration.

"It's difficult to say, 'now's a good time to enter into a buy-in or a buy-out'," says Andrew Reed, Prudential's director of defined benefit solutions, "because although it is very much a good time if a company has the right assets, for some companies it is not possible. They may be quite heavy in equities, and equities have dropped down in value quite significantly."

Prudential therefore offers a nuanced range of approaches suitable for companies' specific needs. With schemes increasingly using a combination of solutions as part of their long-term risk management strategy, Prudential works on ways of incorporating these into an individually tailored route map.

An important point of focus has been adding flexibility to buy-in contracts. One such area of flexibility is to cover future retirees within a transaction at an affordable price - a pilot project known as Defined Benefit Vestings. "Defined Benefit Vestings allows you take out annuities as people retire," says Reed. "That's particularly attractive when you've secured your pensioners, and you just want to carry on building up the annuitisation."

Another promising solution is the Future Premium Product (FPP). It is suited to most schemes and avoids the drawbacks of the much touted longevity swaps, which for some schemes may not represent especially good value for money.

The main thing, as Reed and Wenzerul see it, is to ensure that you pick an insurance company that will work with you to provide the optimal solution for your particular scheme. "With more turbulence expected ahead," says Wenzerul, "we recommend schemes transact with a counterparty that is financially secure, stable and will be around in the market for the life of its members."

It is an area of the market in which Prudential holds great sway. With an instantly familiar brand and a long history in life insurance, the company benefits from a potent combination of solid administration and financial strength. Since 1997, it has secured pension scheme liabilities in excess of £5.4 billion, and has successfully completed over 430 buy-out/buy-in transactions. Such transactions look set to continue for many years.

"My view would be, understand what your criteria are for transacting," says Reed. "If you can find a counterparty that you believe is strong and reliable, and they can meet that price, then transact. Don't wait. You often miss the boat."

Greg Wenzerul, corporate deal principal at Prudential.
Andrew Reed, Prudential's director of defined benefit solutions.