BSW Timber has saved £5m in liabilities and reduced its deficit by a quarter due to a medically underwritten mortality study (MUMS).
The sawmilling company which has 1200 employees and a pension scheme with liabilities of £50m carried out the MUMS in mid-2015.
Information gathered by MUMS include members' health and longevity prospects. It provides insurers with in-depth insights into the risks presented by specific tranches of scheme liabilities, and can lead to reductions in transaction pricing.
Medically underwritten deals accounted for 15% of all sub-£100m deals in 2015 according to a report by The Pensions Institute.
BSW Timber's existing mortality assumption was previously set on a postcode analysis basis, which had been overstating life expectancies by around two years.
Incorporating the mortality study data into the company's funding information resulted in the company's deficit being reduced by more than a quarter from £11m to £8m.
As part of the study, MorganAsh was contracted to interview 26 pensioners and their spouses who made up over 85% of the pension liability.
The study received a high response rate of 96% due to close collaboration between the contractors, trustees and their members.
As a result of the MUMS valuation the company could insure all current pensions in payment without additional contribution from either the company or scheme.
BSW Timber has also become one of the first UK companies to use medical underwriting for both an insurance transaction and valuation purposes.
Furthermore, similar projects with high participation rates conducted by KPMG and MorganAsh have resulted in overall liabilities being reduced by 5%-10%. This has resulted in deficit reductions of 10%-50% for various companies.
MorganAsh director Andrew Gething said: "Using actual health data to understand the mortality of scheme members can improve the accuracy of predicting mortality for schemes and reduce the reliance on mortality assumptions."
"Using an evidence based approach to improve accuracy of data is just a logical stop from postcode analysis and a solid step regarding medical data."
"It is always good to be prepared and have one's data in order. This equally applies for insurance contracts. There is no reason to leave the medical underwriting until the last minute for insurance tenders.
"Having the medical information available to hand can allow companies to choose the timing of tenders to take advantage of financial markets, or the developing competitive position in the market with consolidations and new entrants," Gething added.
KPMG pensions actuary Iain McLellan (pictured) said he expected more trustees and sponsors to follow BSW Timber's lead and use individual member underwriting to really get to grips with their longevity risk.
"The impact on any individual scheme from underwriting their membership will vary depending on its individual circumstances and the actual data that is gathered. Therefore, careful planning on the suitability of mortality studies is essential," McLellan said.
"Effectively, we're seeing medical underwriting of individuals start to be used in the insurance space and this is an example of it coming into pension scheme funding and valuations," McLellan said. "I think this will become much more standard with more schemes adopting this type of approach going forward with insurance transactions."
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