Medically Underwritten Bulk Annuities

Lloyd Richards contributed to the writing of this blog

The bulk annuity market has developed rapidly over the past few years, and despite a stall in growth throughout 2012 it is expected to continue to thrive as insurers develop innovative ways to de-risk defined benefit pension schemes.

Significant changes in the market are predicted in a recent report by the Pensions Institute at Cass Business School1, which describes the process of medically underwriting a bulk annuity transaction. This is a process long since established in the individual annuity market, where those with a poor medical history or lifestyle indicators – such as smokers – are offered a higher annuity compared with standard terms, due to their shorter life expectancy. So far, it has failed to penetrate the bulk annuity market because of an extra layer of separation between the insurer and the insured life.

In the individual market, the incentive to the annuitant is clear; they can get a higher income! But for defined benefit pensioners, the lower cost would translate to savings for the pension scheme and ultimately the company, rather than an increase in their own income. The difficulty of arranging medical underwriting and encouraging members to respond and the cost of underwriting large groups of members has, until now, proven too great a barrier for trustees looking to de-risk as quickly as possible.

However, two companies operating in the market for individual enhanced annuities believe they have found a way around this problem, and have recently become the first insurers to offer medically underwritten bulk annuities to defined benefit pension schemes. The focus is typically on:

  • Small schemes with a high degree of trustee contact; typically the trustees will know most or all of the members and may therefore be in a position to assess the potential merits of medical underwriting
  • Schemes where a high proportion of the liability may be concentrated in a relatively small proportion of members.

In this blog we discuss the companies operating in this market, the process of medical underwriting for large groups, and our outlook for the future.

The Companies

Partnership is an enhanced annuity specialist in the defined contribution market that formally entered the bulk annuity market in early 2012, where it believes its medical underwriting offers an edge over competitors. Partnership has been selling enhanced annuities to individuals since 1995 (formerly as the Pension Annuity Friendly Society). Since December 2012 Partnership has been involved in the first three enhanced bulk annuity deals, totalling £6.5m, which some feel could kick-start the market for medically underwritten bulk transactions. All three transactions involved mature schemes with fewer than 20 members. The largest of the three transacted after receiving a quote from Partnership that was approximately 10% below the pricing of other insurers.

Just Retirement is another company specialising in enhanced annuities that entered the bulk market in 2012, although it has yet to complete any deals. Its primary approach is to underwrite a small number of members – those with the largest pensions who represent a disproportionately large amount of the scheme’s liabilities – via a detailed telephone interview to see whether they qualify for enhanced annuities.

The Process

Initial medical data is gathered through a questionnaire for all members, with a GP’s report or telephone interview being used to price the deal more accurately generally limited to those members with the largest pensions. This approach is still new and we can expect to see it become refined as medical data becomes a more common driver in the pricing of bulk annuity transactions. The current approach is still very much geared towards small schemes, where the trustees may know personally many of the members and so can judge the potential results of underwriting. For larger schemes there is scope to use medical data for only the largest pensions and price the rest on standard terms.

Crucially, the medical underwriters do not “cherry pick” the lives who best qualify for enhanced terms, leaving a scheme with only healthy members for whom annuities could only be purchased at a prohibitive cost. The entire pensioner membership, or select cohorts thereof, is insured on terms which reflect the medical status of each individual member.

However, there may be hidden downsides for trustees who request a quote with an insurer that prices based on medical data. If the deal does not go ahead for any reason, any later buyout attempts with other insurers might take place under the assumption from the insurers that they are dealing with a medically superior membership and raise prices accordingly.

Two of the old guard, Legal & General and Aviva, are also expected to extend their medically underwritten products to the bulk market soon. The additional competitiveness these two companies will bring should help trustee confidence in the pricing of bulk deals in future.


The report by the Pensions Institute suggests that medical underwriting could significantly alter the way in which bulk annuity deals are carried out in the future. However, it should be noted that to date only three deals have been completed, and both the insurers currently operating in this market are focussed at the smaller end. It is also worth considering that despite Partnership’s assertion that up to 60% of retirees qualify for an enhanced annuity, in the defined contribution market enhanced annuities account for less than 20% of all annuity sales. The arrival of Legal & General and Aviva on the scene may be a game changer, but it remains to be seen how practical medical underwriting can be for a significant number of schemes.