Premier Pensions' John Herbert explains how schemes can complete a medically underwritten buy-in for their members, in this edition of Technical Comment.
As well as the specialist players – Partnership and Just Retirement – both Aviva and Legal & General have indicated they will consider medically underwritten transactions. So far around 14 transactions have been completed, with the largest approximately £35m.
Key points
Determine if your plan is likely to benefit significantly from medical underwriting using known facts about the plan and the members.
Determine whether the risks and additional costs/timescales are acceptable.
Consider the impact on members of asking these questions and how this should be handled. Are there potential reputational risks for the sponsor?
Currently the focus is on pensioners, where there is more likely to be relevant medical information available and where a significant price differential from conventional buy-ins is likely. However, there is no reason why deferred pensioners should not be included in the future.
Why do it?
The overall transaction price is likely to be lower because any members with significant health conditions are assumed to have a shorter life expectancy – hence the cost of insurance is lower. The typical savings so far have been around 10 per cent.
This could mean the buy-in option becomes affordable for the trustees and reduces the plan’s risks. From the sponsor’s perspective, both settlement cost and risk are reduced.
How does it work?
In addition to standard information, the insurer also collects medical history and lifestyle information. For example, height, weight, smoker, blood pressure, etc.
This information usually needs to be obtained from each member, so the engagement process is critical to the overall success. This may take the form of questionnaires or telephone interviews.
It is usually helpful to analyse the overall plan to determine if medical underwriting is likely to be beneficial and possibly apply a filter to identify cases with a larger liability, or known health issues, where underwriting will have the largest impact.
Which plans are most likely to benefit?
Generally smaller plans (fewer than 300 pensioners) are most likely to benefit because they are less likely to have ‘average life expectancy’. A few members may represent a significant part of the overall liability and a health-based adjustment for one or two of these members is likely to impact on the overall price.
Plans where the risk profile is unusual may also benefit. For example, if there has been a high number of early retirements on health grounds.
What are the issues?
The main concern is there may be no material reduction to the transaction price because all the lives are healthy or any impairments have very limited impact. Hence, the time and money spent collecting the information was wasted.
Additionally, once you have identified that your members are healthy the cost of a conventional buy-in may increase as the information obtained may need to be disclosed.
Clearly these extra steps will mean more work (and cost) is required and the time taken to transact is likely to be slightly longer. Getting the questions and the approach towards members right is fundamental to the quality of the data collected and the relationship with the plan members.
Does the recent Budget change things?
So far, concerns that annuities will only be bought by ‘super-healthy’ people appears to have had little impact on the pricing of buy-ins. But longer-term competition may increase as margins and volume reduce in the individual market. This could reduce prices for conventional buy-ins and alter pricing differentials against medically underwritten buy-ins.
John Herbert is head of actuarial services at Premier Pensions Management
