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The Actuary The magazine of the Institute & Faculty of Actuaries

New kids on the bulk

Britain’s pension scheme buyouts market, for many years a duopoly, has been shaken up in recent months by the entry of several specialised start-ups. A number of insurance giants also have teams in varying stages of preparation, with the aim of moving into this sector. Estimates for the potential value of the market range from £400bn to 1,000bn, a vast leap from current levels of around £2bn a year.

The players
These new entrants into the market have been created by some of the most pre-eminent professionals in the financial services sector. In some cases, those responsible for broking the first ever bulk annuity deals in the UK have been involved. The senior actuarial functions have been filled by some of the most respected actuaries in their fields.
Newcomers are expected to compete on price, but also on innovative strategies and tailored offerings. Indicative pricing now seen on the market illustrates that they are roughly in line with established rivals.

Structured buyouts
An area that has become something of a hotspot is the concept of a structured buyout. Not many companies can afford to buy out all their liabilities. Under a structured buyout, the least attractive or highest-risk liabilities can be sold to an insurer, while retaining more manageable liabilities.
Companies can select a group of current or deferred pension fund members and sell the assets and liabilities relating to their retirement savings to the insurer. For example, a medium-sized business with a few directors or executives whose generous pension promises make up a huge part of the company’s liabilities could sell those promises to an insurer. Such a deal makes the scheme safer for the remainder of employees and is less expensive than buying out the entire scheme, which can cost more than the fund’s liabilities under actuarial or FRS17 calculations.

Actuarial opportunities
There are a variety of actuarial opportunities within the bulk annuity market, although it is worth bearing in mind that new entrants to the market have, on the whole, expressed the desire to keep their teams fairly small. Therefore, those actuaries with a multitude of skills across pensions, life, and investments have naturally come to the fore. There is not, however, a ‘typical’ hire, as the teams being constructed reflect the differing approaches and strategies for providing competition to the two established players in the marketplace.
At a senior level, some start-up companies have brought actuarial investment heavyweights on board to provide expertise, direction, and credibility in this area. Other hires and potential growth areas have focused on actuaries with a life and investment background and LDI and ALM experience, particularly those with the ability to integrate these relatively innovative skills.
Strong pensions consulting actuaries with an emphasis on commercial acumen and communicative ability have also been sought after. One thing that is shared in common by all of the new entrants is the strategy of outsourcing almost all of the administrative actuarial work that will be required to facilitate the deals currently under negotiation. As these deals are completed, the beneficiaries will not only be the new players that have set them up, but the pensions consultancies associated with them.
Teams within the larger insurers are typically comprised of actuaries within the organisation, with contractors being used where necessary. The advantages of joining these small teams are manifold:
– Exposure to a range of disciplines across the life and pensions spectrum.
– The opportunity to work with a variety of financial service professionals, all with a proven track record in their field.
– A wide variety of work in a ‘green field’, in a sector in its infancy.
– Potential equity and healthy bonuses in an expanding area of the market.

A gamble
Although all of the organisations entering the market have clear business plans and strong financial backing, it is a new market, and as such, not for the ultra-cautious. Bolstered by the entrance of these heavy hitters who are applying their expertise, the bulk annuity market has also received an injection of vigour in the form of specialised start-ups. Forecasts of vast numbers, paired with regulatory concerns, may lead some to think that the bulk annuity market is something of a South Sea Bubble. There is of course an element of risk to any new undertaking. However, as the famed American financier Bernard Baruch said: ‘There is no investment which does not involve some risk and is not something of a gamble.’