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02

Medical underwriting 'could cut de-risking costs by over 10%'

Open-access content Monday 4th February 2013 — updated 5.13pm, Wednesday 29th April 2020

Taking pensioners’ health and lifestyle into account could reduce the cost of de-risking a defined benefit pension scheme by 10% or more, according to research published today by The Pensions Institute.

2

Medical underwriting under an enhanced bulk purchase annuity buy-in could also speed up the entire process of moving the risk associated with a pension scheme onto an insurer, the report, A healthier way to de-risk, explained.

By making previously unaffordable transactions possible, the practice could also increase the percentage of schemes that are able to complete a buy-in, which is an 'essential' step towards a final buy-out. Currently, only 20% of buy-in quotations result in a completed transaction, according to industry figures quoted in the report.

Members will also benefit from these transactions, which can make schemes more secure and less likely to transfer to the Pension Protection Fund at a time when economic conditions are increasing pension liabilities and, as a result, putting more pressure on sponsors.

The start of 2013 has seen the completion of the first enhanced buy-ins taking medical issues into account, with an initial focus on smaller schemes with up to 400 pensioners. However, the report estimates the market could be worth up to £380bn if it was scaled up to cater for all sizes of scheme pensioner sections.

Dr Debbie Harrison, senior visiting fellow at The Pensions Institute, which is based at Cass Business School, said: 'This is a major development in the de-risking market. Trustees and scheme sponsors depend on securing affordable buy-ins in order to reach their ultimate goal, which is to transfer all liabilities to insurance companies.

'The introduction of medically-underwritten buy-ins will help them to reach this goal more quickly - a development that should be welcomed by stakeholders and regulators alike.'

While the enhanced bulk buy-in market is expected to grow as conventional insurers develop their own medical underwriting services or make deals with specialists, the report called for a clear regulatory framework to be set up to ensure the market reaches its full potential.

In particular, it advocated 'consistent' regulation of the bulk purchase annuity market, with the updating of the memorandum of understanding between the Financial Services Authority and The Pensions Regulator. This was last updated in 2007, prior to the development of the de-risking market.

A code of practice is also needed, with agreements between the government, regulators and stakeholders, to safeguard the interests of trustees, employers and members. This should address areas including the need for accurate data, how insurers collect medical information on scheme members and the procedures schemes adopt on the death of a member.

This article appeared in our February 2013 issue of The Actuary.
Click here to view this issue
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