28th February 2019 Paul Andrews
An innovative bulk annuity for family business NG Bailey as they work to ensure the long term security of the company pension scheme.
NG Bailey are a fourth-generation, family-owned construction and facilities management business based in Yorkshire. Like many businesses, it's got a significant final salary pension scheme, with over 3,000 members and £300 million of assets.
The company’s goal is to focus on the core business whilst also working collaboratively with the pension scheme trustees to ensure the long term security of the scheme for members.
The first step to achieving this goal was to identify the biggest risks facing the scheme and find ways of mitigating them.
“When we looked down the list of risks, one that stood out was that some members have much larger pension promises than others and therefore if they happen to live longer than expected, that can have a disproportionate impact on the funding of the scheme,” says WPS Director and independent trustee for the scheme, Jon Sharp. “So when the pension scheme’s investments were in a good place, it was decided to insure the pensions of these highest members with a buy-in using a medically underwritten bulk annuity.”
A buy-in is an insurance policy that protects the scheme against longevity, inflation and investment risks. It guarantees a monthly cash flow to the scheme which exactly matches the benefits selected for the members insured. “No further payments from the scheme or sponsoring employer will be required to secure these benefits, even if the members covered live longer than expected, markets fall or inflation soars. This caps some of the scheme’s liabilities and protects NG Bailey from market movements for the benefits insured,” says Rob Mechem, head of business development at Just DB Solutions.
A ‘top-slice’ creates a segment of members with the highest pension liabilities, often executives of the business. In this case, the trustees and NG Bailey agreed that £50 million of scheme assets would be paid to an insurer to provide cover.
“That’s where DB Choice and this flavour of medical underwriting process becomes quite powerful,” Sharp says. “It allows you to insure longevity, inflation and investment risks at a good price. Just simply provided their best price, making it very straightforward and easy to compare with other providers,” he explains.
Just are the only insurer quoting in the UK on a medically underwritten basis. Medical underwriting collects lifestyle and medical data from the members to be insured allowing Just to estimate how long each member will live and therefore how long Just will have to pay the benefits covered to the trustees. “It provides a more accurate assessment of longevity than using proxies such as postcode, gender and age and offers the potential for savings compared to a standard (non-medical) process,” says Mechem. “We always quote on a medical basis where there are 300 members or fewer.”
Just was able to insure 100 NG Bailey pensioners for the £50 million of assets available. Completing the transaction took just two months from inviting insurers to tender to getting the protection of a buy-in. The medical underwriting process kicked-off just after the transaction and was completed a few months later.
The NG Bailey pension scheme sent the medical questionnaire to members, as opposed to it being sent by Just, as the scheme was very keen to ensure that members would not feel obliged to respond. “We wanted to have that partnership approach in the way it was communicated to members, to make sure it was appropriate and that no one felt under pressure,” Sharp explains.
The questionnaire has been designed to be simple to complete and asks only six medical questions. As a result, the pension scheme received just one member query, checking that their pension amount was not changing. “Most members positively received it,” Sharp says. “For a lot of businesses and especially family-owned ones like NG Bailey, there is a warmth between the pensioner, former employer and trustees. Many members were pleased with the idea that if they provided some details it may help the pension scheme to be run better.”
NG Bailey was also very happy with DB Choice. “We were pleased with the buy-in process, which is a positive step in helping us manage our pension scheme to the benefit of scheme members, employees, customers and shareholders,” NG Bailey CFO Mike Porter says. With the success of this transaction there is likely to be further de-risking activity to help the trustees to insure the scheme members’ entitlement and allow NG Bailey to focus on its core business.