The Trustee sought to define a clear flight path to reach their expected objective of buying-out the scheme and establish the governance and market relationships to capture pricing opportunities in longevity de-risking, as they arose.

The background

The M&S Pension Scheme is well-funded, with £11.4bn of assets (as at 31 March 2021). Around 40% of the liability is in respect of pensions in payment.

LCP was appointed as strategic longevity de-risking adviser in 2016 to a joint working group of Trustee and company representatives, established to allow collaborative working and ensure effective decision-making.

As part of that appointment, we modelled asset and liability cash flows in detail with LCP Visualise and calculated a best estimate measure of longevity risk using LCP LifeAnalytics (developed to mimic reinsurer pricing observed in the longevity swap market). Results confirmed that longevity risk had become the scheme’s dominant risk.

We also produced an annual projection of both the cost of buying-out the whole scheme (taking into account assumed pensions paid and member exits) and the expected maturing of the asset base (also including assumptions for payments made and best estimate returns) using our actuarial modelling system, LCP Visualise. This gave the working group a clear understanding of how the scheme is expected to run-off and when it could be expected to pass into a “buy-out window”, defined as the period during which assets are expected to exceed the projected cost of buy-out under different pricing scenarios. A wide buy-out window would indicate uncertainty in the anticipated timing of any buy-out, for example because of insurer pricing risk.

Our solution

We identified that the optimal way to narrow the buy-out window would be through a combination of buy-ins and longevity swaps removing components of buy-out pricing risk as early as possible along the flight path.

Key to the success of this strategy is engagement by both reinsurers and insurers. This was supported by our innovative “common data room”, LCP Vault, that enabled insurers and reinsurers to access the same data and answers to all parties’ queries, simultaneously. In addition, we helped the Scheme maximise engagement with the market through:

• Thorough preparation of data, benefit information and required commercial terms before approaching the market.
• Clear communication to both insurers and reinsurers of the Trustee’s wider objectives and de-risking strategy, and details of the process to be followed.
• Commitment to the initial transactions to demonstrate effective governance and (subsequently) a desire to execute repeat business.

The journey so far

Like many others, the M&S Pension Scheme had de-risked a portion of its assets into gilts, following successful investment outperformance and to hedge interest rate and inflation risks.

It was identified that an amount of these gilts were surplus to the scheme’s liquidity needs, collateral requirements or ongoing investment strategy. Given attractive buy-in pricing (supported by attractive longevity reinsurance pricing) we determined that the most efficient way to remove an initial tranche of longevity risk was through purchasing buy-ins using surplus gilts, therefore not disrupting the scheme’s investment and hedging strategies.

The Trustee has executed six buy-ins (since 2018) covering £3.8bn of liabilities, with each of three insurers that now form a panel that can be approached (and/or added to) in the future.

The results

The Trustee has agreed “umbrella contracts” with each of the insurers of the panel to allow follow on buy-ins to be added quickly and very efficiently as pricing opportunities arise. The most recent transactions were completed in summer 2021, within two weeks of final pricing being agreed with insurers.

As a consequence of the relationships (with both insurers and reinsurers) that have been established in the market and the governance and processes now in place, the M&S Pension Scheme has the flexibility to increase its longevity hedge ratio through a combination of buy-ins (as additional surplus gilts become available from asset de-risking) or longevity swaps (if such gilts are not yet available). Care has been taken to consider the ease and cost-efficiency of converting any longevity swaps into buy-ins on the flight path to buy-out.