Medical underwriting – just what the de-risking doctor ordered?

The medically underwritten bulk annuity market continues to go from strength to strength, with the specialist insurers reporting a healthy pipeline of potential new business.  This growth has been supported by some very competitive pricing and the significant savings, relative to a traditional approach, which have been achieved by schemes.

The recent 'top-slicing' transaction for the Renold Pension Scheme outlined below, where we jointly advised the trustees and the company, demonstrates the potential attractions of medical underwriting for schemes and their sponsors.  The scheme was able to remove risk with no additional cost on a scheme funding basis.

The development of 'top-slicing' – which involves a tranche of pensioner members with the highest liabilities being covered by a partial buy-in – has opened up the medically underwritten market for larger schemes. Under this approach, the use of medical underwriting can offer an effective way of removing the concentration of longevity risk associated with the big hitting pensioners, at an attractive price.

Whilst the process of gathering medical and lifestyle information for individual members can provide material savings in its own right, the recent competitive pricing levels have also been supported by the strong desire of the specialist insurers to grow this area and establish their market positon. The insurers’ appetites have been further strengthened by the dramatic decline in individual retail annuity sales as a result of the new pension flexibilities introduced in April this year.

Going forward, the level of competition is likely to be bolstered by the emergence of some new faces in the bulk annuity market offering a medically underwritten option, but the question remains whether the recent pricing levels are sustainable over the medium to longer term, and if not, how long they could continue to be available?

Medical underwriting will not always be appropriate for schemes, and trustees and sponsors need to think carefully before adopting this route. However, it should at least be considered at the outset and in the right circumstances has the potential to deliver some very positive outcomes.

'Top-slicing' buy-in

An opportunity was identified for the Renold Pension Scheme, the £200m defined benefit scheme of an international engineering company, as part of their overall de-risking journey.

The trustees and company worked closely together with us to successfully complete a £25m medically underwritten buy-in with Just Retirement for the top tranche of pensioners - representing around 25% of the total pensioner liability. We were able to obtain favourable pricing following a competitive tender process, with a third party engaged to collate the medical underwriting information.

Through effective member communication, and direct engagement, an extremely positive member response rate of over 90% was achieved. Completion of the transaction also included a price tracking and execution mechanism designed to reduce the risk of market movements relative to the gilts holdings used to fund the premium.

Overall, significant savings of more than 10% were possible relative to a traditional approach. Full matching and risk mitigation in respect of the members covered was delivered, including a key aim of removing the concentration of longevity risk.

"The company considers this transaction to be an important move in helping to manage its legacy pension obligations and the impact of volatility on its balance sheet. Attractive pricing through the use of medical underwriting allowed us to secure a material proportion of the pensioner liabilities at no additional cost, thanks to the proactive advice and commitment of Barnett Waddingham."
Brian Tenner Finance Director, Renold plc