PRUEBA DE HIPÓTESIS

for benefit errors or

missing beneficiaries

uncovered in future

and could be paid for

by asking the employer

to set aside a special

fund for the purpose or

agreeing to include the

liability in the valuations

to ensure funding over

the longer term.”

Few, if any, insurers will provide protection against the risk of future GMP equalisation, and the premium for such insurance will tend to be very high.

Before asking the insurer to cover data errors, trustees should check whether or not this risk is already covered by an existing indemnity insurance policy.

The more factors below that apply to the scheme, the more data risk faced: • The scheme is more than 10 years old.

• The scheme is large (over 1000 members).

• The scheme benefit basis is complex (hybrid, contracted out). • The administrator holds paper files outside of the computer system. • Scheme members are at multiple employment locations.

• The benefit basis has changed more than once.

• The administration system was changed more than 3 years ago. • The scheme administrator has changed.

• The pensions manager has changed in the last 5 years. • The operating location has changed in the last 5 years. • The employer has bought and/or sold other companies. • The scheme has never had a formal data audit.

12. Longevity Insurance

• Longevity insurance is a means of transferring mortality, longevity and demographic risk from a pension scheme to a third party – typically an insurer, reinsurer or an investment bank.

• The pension scheme agrees to pay the third party a fixed set of monthly instalments, and in return the third party agrees to pay the actual monthly pension instalments to the pension scheme over the duration of the contract. Both legs will normally rise with inflation, meaning that the inflation risk remains with the pension scheme.

•Typically only pensioners in the course of payment (together with contingent benefits) are covered and dependants and deferred members excluded. • Unlike a Buy-in/Buyout contract, there is no up-front premium, so the

pension scheme retains control of its assets but has the contractual obligation to meet the fixed-leg instalments when they fall due.

• The contract will be collateralised to provide protection to either party in the event of a default by the other party.

The past few years has seen the advent of a new approach to de-risking pension schemes with a number of high profile completions already taken place in 2009 & 2010. For example, the £3 billion transaction between the BMW pension scheme and Deutsche bank (via its subsidiary Abbey Life) in Q1 2010 and the £750 million transaction between the Royal County of Berkshire pension scheme and Swiss Re in Q4 2009.

Longevity insurance is a means of transferring mortality, longevity and demographic risk from a pension scheme to a third party – typically a (re)insurer or an

investment bank.

Under such an arrangement, the pension scheme agrees to pay the third party (for example an insurer) a fixed set of monthly instalments (the “fixed leg”), and in return the insurer agrees to pay the actual monthly pension instalments (the “floating leg”) to the pension scheme over the duration of the contract.

Typically, both the fixed and the floating leg would increase with the actual pension increases of the scheme. This would also be the case for increases linked to variants of RPI, for example LPI, with both legs increasing with the actual level of RPI (or its variants) over the period.

This means that the RPI risk is retained within the pension scheme and not transferred to the insurer with the other risks.

Currently, it is typical that only pensioners in the course of payment (together with contingent benefits) are covered, and other dependants such as children are excluded. Also deferred members are not currently covered under such contracts because of both the extremely long period of longevity risk with these members, and the uncertainty surrounding the various options these members have either before or at retirement (for example transfers or early retirements). The latter makes predicting the cash-flows very uncertain.

An illustration of the mechanics of the arrangement is shown below:

Contracts can either be for a fixed duration, say 50 years, or for the remaining lifetime of the lives covered. Additionally, under some arrangements, the floating leg can reflect general population mortality rather than the actual mortality of the lives covered in the contract.

The contract is collateralised to provide protection to either party in the event of a default by the other party.

Unlike a Buy-in/Buyout contract, there is no up-front premium, so the pension scheme retains control of its assets but has the contractual obligation to meet the fixed-leg instalments when they fall due.

Pension schemes find such arrangements attractive as it mitigates the risk of members living longer than expected whilst retaining control and flexibility over the scheme assets. The trustees are exchanging unknown future pension instalments for a more certain and predictable cash-flow. This enables the trustees to plan and negotiate with employers with more certainty.

Structure Diagram

Insurer Pension Scheme

Floating

Actual annuity payments as they fall due

Fixed

Nominal cash-flow fixed on day 1 of the contract

“Contracts can either