Medical underwriting set to grow as effective means of de-risking bulk pension liabilities, experts say

A new report by the Pensions Institute (86-page / 504KB PDF), which is part of Cass Business School in London, said that some firms were reporting savings of between 5% and 10% on the cost of selling on their pension liabilities when using medically underwritten bulk annuities (MUBA). In particular, the report said that 'top-slicing' the largest pensioner liabilities was a particularly cost effective method of reducing risk.

The number of medically underwritten deals increased from a 'standing start' to account for over 15% of bulk annuity transactions by 2015, according to the researchers. Professor David Blake, director of the Pensions Institute and one of the authors of the report, said that there was "significant scope for further expansion", as those insurers that had committed to medical underwriting began to compete for more traditional business.

Matthew de Ferrars, Robert Tellwright and Robert Lawrence of Pinsent Masons, the law firm behind Out-Law.com, contributed to the findings in the report. In 2015, the firm successfully advised on 38 bulk annuity transactions.

"The report neatly captures the transition of medical underwriting from being something that sat on the peripheral of the defined benefit (DB) de-risking market in 2013 to a process that is now well-established and very much sitting within the mainstream," Lawrence said. "Attractive pricing, product innovation, the standardisation of medical data collection and a greater understanding among professional advisers have all assisted in pushing medical underwriting to the fore as a de-risking option."

Buy-outs effectively relieve companies of the investment and longevity risks associated with historical DB pension schemes, which are schemes that promise a set level of pension once a member reaches retirement age regardless of the performance of the underlying investment. The majority of these schemes are now closed both to new members and to further accrual of benefits, creating an opportunity for insurers to take over these liabilities in exchange for a premium.

Over £100bn of UK pension scheme liabilities have been insured in this way since 2007, according to the report. A growing proportion of these transactions have used medical underwriting to reduce costs, by using information on scheme members' lifestyles and health to give more accurate calculations of life expectancy. 'Top-slicing' can also be used as a means of insuring separately a smaller number of high liability individuals. This information is usually gathered via member questionnaires, telephone interviews and GP reports.

The report found that medical underwriting was a significant factor contributing to lower costs for bulk annuity deals, although competitive pricing was also driven by the investment strategy used by insurers and their appetite to write new business. It also found that the process of collecting medical information had standardised considerably since previous research by the Pensions Institute in 2013, although there was still scope for further standardisation and cost reductions particularly in relation to the more detailed information collected by telephone or from GP reports.

Most market participants interviewed as part of the research said that medical underwriting was now an established part of the bulk annuity market for smaller schemes, and would account for a substantial proportion of such deals in the future, according to the report. 

"There remains a high level of confidence that medical underwriting will continue to offer attractive de-risking opportunities for pension scheme trustees," said Robert Tellwright of Pinsent Masons.

"We also expect that the arrival of new entrants to the market, as well as established insurers taking a greater interest in medical underwriting, will help to contribute to an efficient and growing market," he said.