Pension scheme de-risking can open doors for advisers
De-risking of smaller pension schemes through use of medically underwritten bulk annuities offers advisers a ‘profitable, sustainable and valuable new market’, says Partnership’s Martin Lines. ABR reports from Partnership’s recent adviser forums
Growth in demand for de-risking of smaller pension schemes is giving advisers the opportunity to work with new corporate clients as well as the trustees of companies’ defined benefit (DB) pension schemes through the use of medically underwritten bulk annuities, according to Partnership.
Presenting at the group’s recent ‘Freedom and Choice: Bringing it all together’ adviser forums, business development manager Martin Lines said the sweet spot for advisers was for schemes with around £50m in assets.
This is an area of experience that advisers have that, typically, those already advising the schemes do not, said Lines, which gives advisers an advantage when approaching employers about de-risking their pension schemes. “Adviser have the knowledge and experience of dealing with medically underwritten business and that is going to stand them in good stead,” he said.
The de-risking process
Defined benefit schemes already have a higher skew towards the in-retirement population and the fact that those already taking benefits are unable to transfer out means schemes will retain an ongoing burden while potentially seeing individuals post 55 years of age but with their pensions intact, transfer out, thereby reducing the capital with which to meet their liabilities.
“But there is nothing stopping the scheme from de-risking the liabilities that are left, without individuals transferring out, through underwritten bulk annuities,” Lines pointed out.
“What schemes can do where they are committed to paying out to individual retirees for life, is to pass on some of the longevity risk to an insurer and buy an annuity to pay the annual sum by using the individual’s personal details when placing that annuity.”
By giving as much detail as possible, Lines said, via medical underwriting “it is possible to reduce the cost of providing that exact same annual sum to that retiree. Which is why enhanced DB de-risking is really coming to the fore now.”
While the idea of de-risking has been used by schemes for decades, Lines continued, it is the use of medical underwriting that has seen use of bulk annuities increase in popularity.
“What’s good news for local and regional IFA firms is that they already know the benefits of underwriting in individual cases and are tuned in to the value that medical underwriting delivers and so are well placed to make it work on a wider scale.”
In Partnership’s experience, he added, “there is a range of schemes that seem more appropriate for local and regional firms to get involved with, which is those with up to £50m in scheme assets. This seems to be the sweet spot. On the other hand, at the end of last year we had a scheme de-risk to the tune of £206m.”
“There are massive opportunities for advisers but because these are big numbers it can be quite daunting,” Lines said. “Also there are a number of others firms already advising the scheme and with which the employer and the trustee will be familiar, such as the scheme actuary, the investment adviser and so on. So how do you get into that environment when he also many other interested parties advising them already?”
Lines added that Partnership offers support in a number of ways.
• Marketing: “What you need to look at is what you offer as an independent financial adviser that is different from all these other parties. Where can a regulated investment adviser help in the task of de-risking a scheme? We can help write that scope so employers are clear what part an adviser plays.”
• Account management: “Every time there is an enquiry an account manager is allocated to help the adviser through the process. They can help with every aspect of dealing with the employer and that particular enquiry.”
• Initial assessment: “This helps prioritise the leads, saving time, money and resource. If the scheme doesn’t fit you don’t waste any time on it,” Lines added.
• Data collection: “This can be the tricky part of the process,” Lines said. “An individual receiving £20,000 a year is going to get that whether the scheme de-risks or not. They have little interest in providing their medical details. It needs a carefully worded argument around the reasons it is beneficial for that individual to provide the information and a process that also makes it easy for them to supply those details. We have expertise in getting the detail required.”
Lines concluded: “There is a massive opportunity here for advisers to get involved in a profitable, sustainable and valuable new market.”
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