Our viewpoint

Using top-slicing
effectively as part of your pensions de-risking strategy

"Top slicing" – not to be confused with income tax relief! – has gathered some real momentum in the pensions de-risking space, particularly since Just Retirement and Partnership entered the buy-in market.

In our June 2015 De-risking Update, I explained what top-slicing means and how it can help insurers to reduce their buy-in price. Since then, more and more trustees and companies – a number of whom hadn’t considered this concept previously – have asked us to explore whether top-slicing could be suitable in their circumstances.

The success behind top-slicing is medical underwriting – which gives specialist insurers a better understanding of how long members might live, allowing them to be less cautious when pricing the buy-in.

Without medical data, insurers have to gauge each member’s longevity relying on traditional underwriting factors like age, post code and pension size. As the insurers hold relatively little data that is relevant to your high-earners – some of whom may own the only house in their post-code! – they will tend to assume they are in the best health and increase their price accordingly. Indeed, given this lack of credible data, some insurers may even decide they are unable to quote for your very highest earners.

Medical underwriting therefore makes particular sense for high liability members, such as executives – who will of course have a significant impact on your buy-in price.

Furthermore, top-slicing away your largest liability members will leave you with a more regular set of liabilities that traditional insurers will find more attractive. This will help you to get more competitive buy-in pricing in the future, amidst a market that is becoming increasingly busier with insurers being more and more selective.

If you would like help assessing your de-risking options, then feel free to call me, or another of my colleagues in our specialist buy-in, buy-out and longevity swap practice.