Aon Hewitt has combined its liability management and risk settlement teams in response to increased pension scheme demand to accelerate their journey to buyout.
The merger, which occurred in the summer, is aimed at ensuring clients can take joined-up decisions and capitalise on both liability management and risk settlement opportunities.
While more schemes are looking to buyout their liabilities as they mature, it can take a very long time, and for a typical scheme it is likely to take upwards of 20 years.
Aon believes by combining tactical and opportunistic settlement opportunities, committing contributions to the scheme and adopting liability management, they can get closer to their long-term objective than anticipated.
Senior partner and head of the risk settlement group Martin Bird said: "The impact of some of the solutions in isolation can sometimes seem small but if you add up the effect of all the different marginal gains, then the time taken to full buyout can be greatly reduced."
He pointed out the pricing advantages of being able to move quickly to buyout.
"With some of the opportunities we have seen in the buy-in market since the EU Referendum, it has been possible to secure pricing which is 5% better than typical pricing but this is only possible for schemes which are prepared and able to move quickly."
Partner and head of the member options team Ben Roe added the merger was driven by client demand and is a "natural evolution" of the way the teams been working more closely together in the past 18 months.
"As schemes mature, more are getting close to their end game, and figuring out what they need to do to get the scheme ready to buyout, for example," he said.
"Historically liability management exercises were viewed as a corporate tool to reduce deficits. But more and more we're seeing companies and trustees looking at it from a settlement lens, and have their end game in mind."
As the cost of securing inflation-linked pension increases can be expensive, offering members a pension increase exchange (PIE) can result in huge savings when going to buyout.
"Even with standard pension increases you end up paying a premium for the caps and collars on inflation, and in some cases this can create a settlement cost which is 5% or even 10% higher than the funding cost.
"Offering members a PIE option not only provides them with a valuable option with more flexibility and choice over their benefits, but it can also lead to material savings on a buyout basis. We are currently seeing take-up rates on average of over 40% and at these levels the buy-out cost reduction could be up to 10% of the liabilities in some cases."
The Smiths Industries Pension Scheme has secured a £146m buy-in with Canada Life in its fourth bulk annuity and its sponsor’s tenth overall.
The Prudential Staff Pension Scheme has entered into a £3.7bn longevity swap with Pacific Life Re, insuring the longevity risk of over 20,000 pensioners.
The Baker Hughes (UK) Pension Plan has secured approximately £100m of liabilities through a buy-in with Just Group.
There have now been a total of 30 longevity swaps over £1bn publicly announced. The full list, provided by Willis Towers Watson and through PP research, is as follows...
The Reckitt Benckiser Pension Fund has secured a £415m buy-in with Scottish Widows, insuring the benefits of around half of pensioners.