This document provides a quarterly update on the UK pension plan de-risking market in Q4 2012. It summarizes regulatory developments like changes to RPI/CPI calculations and reductions to the annual and lifetime pension allowances. It reviews recent de-risking transactions including bulk purchase annuities and longevity swaps. It also looks ahead to expected continued strong activity in buy-ins and potential growth in the longevity swap market in 2013 as more insurers enter.

1. De-risking market quarterly
update: Q4 2012
Welcome to our quarterly update on the latest developments in the defined
benefit (DB) pension plan de-risking market. We will be looking at all aspects of
the market, including regulatory developments, product development, completed
transactions, product pricing and market sentiments. We will also provide views
on the future development and shape of the market.
This continues to be an extremely interesting and dynamic time in the de-risking market, with activity
continuing to be strong despite gloomier predictions over the time it will take for the economy to
recover.
In this update, we look at the last three months of 2012, including providing a background to some
pertinent regulatory issues, the drivers behind recent de-risking activities, some innovative de-risking
solutions that we can advise on and a preview of how we think the market will develop in the next six to
twelve months.
The overall effect will depend on the option
Regulatory issues in the market chosen and benefit structure of the pension
RPI averaging method
scheme
On 8 October 2012, the Office for National
3) CPI-linked benefits will not change on an on-
Statistics (ONS) announced a consultation about
going basis. However, insurers do not
the method used to calculate the Retail Price Index
currently have a large market in which to
(RPI). There are two key reasons RPI is expected
purchase CPI-linked assets, so often use RPI-
to be consistently above the Consumer Price Index
linked assets as a proxy, which will be cheaper
(CPI). One is the underlying basket of goods and
. Thus, this change could lower the costs of
the other is the method used to calculate the
de-risking CPI-linked liabilities.
average price. CPI uses a geometric average and
RPI uses an arithmetic average, which has an
upward bias of around 0.5% to 1% pa. The
consultation proposed various options on how to
reduce or remove this inconsistency. The results of
the consultancy will be announced in January 2013,
with anticipated implementation in March 2013.
The impact of this change is dependent on
whether a pension scheme's revaluations are in line
with CPI or RPI. Depending on the option
implemented, RPI expectations could fall
dramatically. This will have three effects:
1) Index-linked gilts are based on RPI, so any fall
in RPI expectations will be reflected by a fall
in the value of any index-linked gilts
2) Any scheme with RPI revaluations will
experience a significant reduction in liabilities.

2. De-risking market quarterly update: Q4 2012 January 2013
Autumn budget The current low yield environment has pushed up
There were two major announcements made by Bulk Purchase Annuity (BPA) prices, which as a
the Chancellor of the Exchequer George Osborne result appear less affordable for many schemes.
in the Autumn Statement 2012: However decreasing yields also provide high
1) The Government announced a consultation returns for investors in gilts. Pension schemes that
on whether pension schemes undergoing use gilts to hedge their pensioner liabilities have
valuations with dates effective from 2013 found that returns on their gilt investments have
should smooth asset and liability values to materially outstripped increases in the cost of a
reduce the effects of day-to-day volatility in pensioner buy-in. Many such schemes have taken
deficits on the results of the valuation advantage and have cashed in their gilts to
2) The Annual Allowance (AA) and Lifetime maximise the coverage they get from these assets.
Allowance (LTA) were reduced from £50,000 The table below is for general guidance and it is
to £30,000 and £1.5m to £1.25m respectively. possible to get prices from the market that are +/-
This will reduce tax relief for many middle and 5% for buy-outs and buy-ins. As scheme funding
high income earners. Pension schemes should positions generally improve (despite short term
revisit the analyses they carried out when the volatility) it is expected that buy-ins will continue
AA and LTA were initially reduced earlier in to be the dominant de-risking transaction in terms
2012. of volume in the market. Recent research suggests
that buy-ins and buy-outs are now more popular
IORP
than longevity risk hedging.
It is apparent that Brussels is watering down some
of the most onerous demands set out in its initial
Indicative price
proposals, which could have seen UK DB pension Strategy (excluding adviser fees)
deficits balloon by up to £350bn. A revised
Directive is due to be released in June 2013. BPA* buy-out 40% to 60% above accounting
liabilities
GMP reconciliation BPA buy-in 10% to 20% above accounting
The Pensions Regulator (tPR) is encouraging liabilities
schemes to use a £2 per week tolerance for setting
Guaranteed Minimum Pension (GMP) amounts. 10% to 15% above actuarial
Indemnity-
Technical Provisions (using CMI
This will significantly reduce the cost of data based
improvements with 1.25%
cleansing exercises. longevity swap
underpin)
GMP equalisation Circa 5% above actuarial
Index-based
Since the closure of the consultation in April 2012, Technical Provisions (using CMI
longevity swap
improvements with 1.25%
there have been no further costs. However,
underpin)
Pensions Minister Steve Webb has stated that the
Government may review its preferred solution to Initial price will be in line with
Deferred
reduce implementation costs BPA buy-out or buy-in pricing,
premium
but total premium payment
BPA
Accounting changes (including lower initial premium)
Pension schemes reporting under IAS19 will have is likely to be higher than initial
changed requirements for reporting periods price due to longevity guarantee
and/or interest on deferred
starting on or after 1 January 2013. These changes
premiums
will significantly affect the P&L stated in the
company's balance sheet. * Bulk Purchase Annuity
Market news
Following patterns observed in previous years,
December proved to be a busy month for
transactions with over £2bn of business being
written. Total business for 2012 will be
considerably lower than 2011 levels, mainly due to
a reduced volume in longevity swaps.
© 2011 Grant Thornton UK LLP. All rights reserved. 2

3. Market sentiment evidence to suggest that the market responds
Investors and equity analysts are increasingly positively to companies that have implemented a
taking into account the risk management strategies materially significant risk reduction strategy on
of companies with DB pension funds. There is their pension plan. See the table below for some
examples.
Share price %
Transaction
Company Date Type of de-risking Before After change
size
Akzo Nobel May 2012 Longevity swap £1,400 million 40.69 40.93 0.6
BPA
Tate & Lyle December 2012 £350 million 756.5 769 1.7
BPA
Cookson July 2012 £320 million 607.5 633.5 4.3
BPA
General Motors December 2012 £230 million 25.63 25.56 -0.3
BPA
Aon Minet July 2012 £100 million 46.43 46.81 0.8
"A small risk premium is payable and the "As the market edges lower, Tate & Lyle has
accounting deficit will increase slightly as a bucked the trend after the group unveiled a
result. But this feels like good business to us" pensions deal with Legal & General"
Investec commentary The Guardian commentary
on Tate & Lyle's buy-in, 10 December 2012 on Tate & Lyle's buy-in, 7 December 2012
Outlook for the next 12 months such as Swiss Re and L&G. Activity in the market
Bulk purchase annuities has slowed due to this turnover in market
With many analysts expecting further Quantitive providers and only two major deals were signed in
Easing in 2013 and predictions of an increasingly 2012, both with Swiss Re.
slow economic recovery, it seems unlikely that we In a Solvency II framework, initial capital
will see any significant upwards movement in gilt requirements are significantly lower for a longevity
yields. Assuming that this low gilt yield is sustained swap than a BPA structure, a feature that we
over the upcoming year, we expect that most BPA expect to attract more insurers into the market.
contracts will be related to pension plans cashing However, as longevity swaps often take some time
in on historic good performance of certain asset to execute, it is possible that deals involving these
classes, such as bonds or deferred premium insurers may not complete until the latter half of
arrangements for those pension plans who need to 2013.
rely on a medium-term pick-up in the equity We also expect more plans to use a combination
market. of solutions to tackle the different risks they face.
Combining a pensioner buy-in and a non-retired
Longevity swap market index-based longevity swap with a liability-driven
There was a rush of activity at the end of 2011, a investment (LDI) overlay can lead to a de-risked
year where around £7bn worth of longevity swaps position that is very close to a buy-out - a ‘DIY
was written. In the first half of the year many buy-out’, where the index-based longevity swap
banks, such as Deutsche Bank, UBS and Nomura would have to be re-executed at the end of each
pulled out of the market, to be replaced by insurers contract term, usually every 15 years.

4. De-risking transactions in the last year
The bulk purchase annuity deals struck in the last 12 months with a premium in excess of £100m are
listed below:
Date Pension scheme Counterparty Value
December 2012
Merchant Navy Officers' Pension Fund Rothesay £680m
December 2012
Tate & Lyle Group Pension Scheme Legal & General £350m
July 2012
Cookson Group Pension Plan PIC £320m
West Midlands Integrated Transport
April 2012 Prudential £270m
Authority Pension Fund
December 2012
General Motors UK Pension Plan Rothesay £230m
May 2012
Gartmore Pension Scheme PIC £160m
July 2012
Aon Minet Pension Scheme PIC £100m
Total £2,610m
The major longevity swap deals struck over the past 12 months
Structure: (indemnity
Date Pension scheme Counterparty Value
or index-based)
May 2012 Akzo Nobel (CPS) Pension
Swiss Re Indemnity £1,400m
Scheme
December 2012 LV= Employee Pension
Swiss Re Indemnity £800m
Scheme
Total £2,200m
Innovation out or mitigate the risks faced by your pension
While a pension annuity buy-in remains the most scheme. Our work can help both privately-owned
popular insurance-based solution used to de-risk a and listed corporate sponsors and trustees to
defined benefit pension fund, Grant Thornton reduce the risk of financial losses as a result of the
can advise on a wide range of new and creative pension scheme and concurrently give more
de-risking solutions, which are tailored to the size, protection for members' accrued benefits.
risks and requirements of an individual pension We also play an important role in providing
scheme. pensions advice in corporate Mergers &
We offer independent advice on structured Acquisitions transactions.
solutions and transactions that will either transfer

5. De-risking market quarterly update: Q4 2012 January 2013
Key contacts
Darren Mason Kelvin Wilson James Edelman
Head of Pensions Director, DB Pensions Assistant Manager, DB Pensions
T +44 (0) 20 7728 2433 T +44 (0) 20 7865 2402 T +44 (0)20 7865 2819
M +44 (0) 7971 434 964 M +44 (0) 7879 667 208 M +44 (0)7780 687650
E darren.m.mason@uk.gt.com E kelvin.wilson@uk.gt.com E james.s.edelman@uk.gt.com
Darren has over 20 years' Kelvin advises on bulk purchase James is a part qualified actuary
experience in corporate annuities, longevity swaps, with an MA from Cambridge
transactions and restructuring. investment strategy (including University and an MSc from
He has led over 100 assignments liability driven investment Imperial College Business School.
flowing from the new legislation strategies) and designing and He has worked with a number of
governing the stronger funding of implementing flight paths for corporates and trustees in the past
defined benefit schemes looking to achieve a on SSF valuation calculations and
pension schemes advising on the target funding objective. negotiations, M&A activity, risk
impact for trustees, companies Whilst at Prudential M&G, Kelvin analyses and implementing de-
funding the schemes and their helped structure the first £1bn risking solutions.
lenders. pension annuity buy-in with Cable He now specialises in advising
Assignments have included & Wireless Superannuation on pension scheme risks and how
changes in covenant as the result Pension Scheme. to manage these risks over the
of a transaction, clearance Kelvin holds an MA from Oxford long term.
applications, employer covenant University and has an actuarial
in SSF valuations, contingent and investment management
asset solutions, covenant background. He has performed,
monitoring and restructuring reviewed and analysed a number
involving scheme sponsors. of valuations. He recently advised
Many of these assignments have a purchaser about the appropriate
included groups with overseas level of price adjustment needed
ownership including listed on a deal involving a defined
companies in the US, France, benefit pension scheme.
Germany, Malaysia, Japan and
Australia.
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6. De-risking market quarterly update: Q4 2012 January 2013
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About Pensions Advisory
Pensions Advisory offer independent advice on structured solutions and transactions that will either
transfer out or mitigate the risks faced by your pension scheme. We can advise on a wide range of new and
creative de-risking solutions, which are tailored to the size, risks and requirements of an individual pension
scheme.
Our work can help both privately-owned and listed corporate sponsors and trustees to reduce the risk of
financial losses as a result of the pension scheme and concurrently give more protection for members'
accrued benefits. We also play an important role in providing pensions advice in corporate Mergers &
Acquisitions.
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8. De-risking market quarterly update: Q4 2012 January 2013
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