Longevity Risk Transfer Transactions Current Trends and ...pensionrisk.prudential.com/pdfs/longevity-risk... · The market is concentrated in jumbo plans ... internal, legal and regulatory

1 For financial professional or institutional plan sponsor use only.

Longevity Risk Transfer Transactions Current Trends and Developments

Primary Competency:

Moderator: Presenter:

Moderator: Vladimir Nicenko, Partner, Willkie Farr & Gallagher LLP

Speakers: Amy Kessler, SVP & Head of Longevity Risk Transfer, Prudential Retirement Mick Moloney, Partner, Oliver Wyman Peter Nakada, Managing Director of Risk Markets, Risk Management Solutions, Inc.

ACLI Annual Conference 2013 New Orleans | October 27-29

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When the pension plan gets in the way of the business plan,

leading companies around the world turn to pension risk transfer.


Pension plan sponsors are surrounded by risk.

For financial professional or institutional plan sponsor use only.

3


Twice in the past 12 years, U.S. sponsors of defined benefit plans have lost over funded status in market downturns. 30%

Funded Status Volatility Has Been Excruciating and Very Expensive

Source: Milliman 100 Pension Funding Index; the 100 largest U.S. corporate pension plans as of August 31, 2013.

U.S. Plans


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The Retired Lifetime of Americans Has Increased Significantly in the Last 40 Years

Source: CDC


Western Pension Funds Could Take A Trillion Dollar Hit Over the Next 30 Years

1-in-100 +4.7 years $1 trillion

Scenario 20501005 •  Advances in individualized

medicine •  Biomarkers decrease drug

development time, cost •  Extreme cancer mortality

reduction – Lifestyle changes – Active screening – Aggressive government

regulation of carcinogens


Companies Choose a Solution Based on Their Needs

Source: Lane Clark & Peacock LLP


Buy-out

•  Complete settlement of plan liability •  Insurer covers investment and longevity risk

Turner & Newall, Nov. 2011; £1.1 billion; Restructuring

General Motors, Nov. 2012; $25 billion; Risk reduction

Verizon, Dec. 2012; $7.5 billion; Risk reduction

8 Chart source: Lane Clark & Peacock LLP


Buy-in

•  Plan investment that perfectly matches liability •  Insurer covers investment and longevity risk

Uniq, Dec. 2011; £830 million; Restructuring

Cadbury, Dec. 2009; £500 million; M&A

British Air, July 2010; £1.3 billion; Opportunistic de-risking



Longevity Risk Transfer

•  Converts unknown future liability into fixed liability cash flow •  Insurer covers only longevity risk

Berkshire County, Dec. 2009; £750 million

Rolls-Royce, Nov. 2011; £3 billion

British Aerospace, Feb. 2013; £3.2 billion



Longevity Risk Investment Risk

Buy-out

Complete settlement of plan liability

Turner & Newall General Motors Verizon

Buy-in

Plan investment that perfectly matches liability

Uniq Cadbury British Air

Longevity Risk Investment Risk


Converts unknown future liability into fixed liability cash flow

Berkshire County Rolls-Royce British Aerospace

Longevity Risk

Chart source: Lane Clark & Peacock LLP

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How Do Our Clients Choose a Solution?

ANY ANY NONE ANY

LARGE HIGH HIGH SOME

Scale Funded Status

Fixed Income Allocation

Risk Retention

Buy-out / Buy-in




Canada

2013

United States

2012

Netherlands

2012


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15 15 © Oliver Wyman

Additional perspective on cost

•  Relative value of two options provides economic framework –  Investment policy drives option

volatility – Funding policy a decision around

best source of borrowing

•  Joint funding and investment policy decision-making suggests three categories

•  Highlights importance of corporate vs. fiduciary perspective


16 16 © Oliver Wyman October 23, 2013

% of respondents

Source: Mercer/CFO Magazine Evolving Pension Risk Strategies report, 2013

Act

ion

to b

e ta

ken

in

the

next

2 y

ears

Planned actions by CFO/Treasurers of US corporates

Expected demand Momentum clearly continued to build in 2013


17 © Oliver Wyman 17

Distribution of US retiree obligations

Source: Oliver Wyman and Mercer analysis, Schedule 5500s / SB

Plans with $1B+ in retiree obligations account for ~60% of overall obligations

Expected demand The market is concentrated in jumbo plans



Market structure Only a limited number of insurers can currently compete credibly for jumbo deals

$50 - $500M

$500M - $1B $1B - $2B $2B - $5B

$5B - $10B >$10B

Retiree obligation

~200 BN ~100 BN ~100 BN ~150 BN ~150 BN ~300 BN

Credible insurers

Many ~8 ~8 ~3 - 4 2-3 2-3

Source: Oliver Wyman analysis, Schedule 5500s / SB



Relative importance by plan size

Issue Small

0 – $100 MM Large

$100 MM – $1 BN Jumbo > $1 BN

1 “Safest available annuity” according to 95-1

2 Structural security (e.g. separate account)

3 Ability to accept in-kind assets

4 Willingness to accept post-lump sum offers

Plan sponsor concerns and relative importance

Note: 95-1 requirements are covered on the following pages. For more detail on issues 2-5, please see Appendix pages 44-47

Deal dynamics Issues for Insurers


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Deal dynamics What deal features did we see?

Dedicated resources, deal / change management infrastructure

Fiduciary

•  In kind asset transfer

•  Retiree lump sums

•  Use of forward agreements on annuity contract

•  Use of independent fiduciary

•  Separate advisors

•  Separate account structure

Corporate plan sponsor



Longevity modeling now considers the drivers of longevity improvement explicitly . . .

Lifestyle

2013

Medical Intervention

NOW

Health Environment

LATER

Regenerative Medicine

Retardation of Aging

2025 2050 MUCH LATER

1

2

3

4 5

© Risk Management Solutions


. . . Including new innovation and burnout for each driver of improvement



Model output is a simulated set of correlated qx tables



We can quantify the offset between mortality risk and longevity risk

US Term Life vs US Annuity



We can quantify the offset between mortality risk and longevity risk

US Term Life vs UK Annuity



Life insurers are the most efficient holders of longevity risk



This presentation is intended only for the use of the individual or entity to which it is addressed, and may contain confidential information. The information contained herein is not for further distribution without the express consent of Prudential Retirement.

This discussion document describes product concepts that are not final. It has been prepared for discussion purposes only. It is not an offer to enter into any agreement. This document does not completely describe the terms of any potential transaction or final product design, and any transaction would be subject to applicable legal and regulatory requirements; internal, legal and regulatory approvals; and final legal documentation. Any indication of pricing provided in this document is for illustrative purposes only.

Prudential does not provide legal, regulatory or accounting advice. Therefore the plan sponsor and its advisors should seek legal, regulatory and accounting advice regarding the legal, regulatory or accounting implications of the insurance contract. This information is provided with the understanding that the recipient will discuss the subject matter with its own legal counsel, auditor and other advisors.

Reinsurance products are issued by either Prudential Retirement Insurance and Annuity Company (PRIAC), Hartford, CT, or The Prudential Insurance Company of America (PICA), Newark, NJ. Both are wholly owned subsidiaries of Prudential Financial, Inc. (PFI) and have no affiliation with Prudential plc of the United Kingdom. Each company is solely responsible for its financial condition and contractual obligations. Neither PRIAC nor PICA are authorized or regulated by the U.K. Prudential Regulation Authority or regulated by the Financial Conduct Authority, nor do they offer insurance or reinsurance in the United Kingdom. PRIAC and PICA do provide off-shore reinsurance to companies that have acquired U.K. pension risks through transactions with U.K. plan sponsors. PRIAC and PICA are not authorized or regulated by the Office of Superintendent of Financial Institutions for Canada or by the Financial Services Commission of Ontario.

Insurance products are issued by either PRIAC, Hartford, CT, or PICA, Newark, NJ. Both are Prudential Financial companies. Each company is solely responsible for its financial condition and contractual obligations. Guarantees are based on the claims-paying ability of the insurance company and are subject to certain limitations, terms and conditions. Products not available in all states.

The Milliman 100 Pension Funding Index projects the funded status for pension plans included in the annual Milliman study of the 100 largest defined benefit plans sponsored by U.S. public companies, reflecting the impact of market returns and interest rate changes on pension funded status, utilizing the actual reported asset values, liabilities, and asset allocations of the companies’ pension plans.

© 2013 Prudential Financial, Inc. and its related entities. Prudential, the Prudential logo, the Rock symbol and Bring Your Challenges are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide.

Oliver Wyman and Risk Management Solutions are not affiliates of Prudential Financial or any of its companies or businesses.


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Longevity Risk Transfer Transactions Current Trends and ...pensionrisk.prudential.com/pdfs/longevity-risk... · The market is concentrated in jumbo plans ... internal, legal and regulatory