Hello and welcome to the latest in our series of Pensions Age video interviews. I’m editor in chief of Pensions Age and joining me today is Will Hale who is responsible for Partnership’s DB de-risking proposition to talk about what I think is one of the most interesting areas of pension scheme de-risking at the moment.

Could we start with looking at what the premise is behind using individual member health and lifestyle information in pension scheme de-risking - how does it actually work?

I think the best way to think about individual underwriting in a DB context is that it is just another rating factor for insurers to use when assessing the appropriate price to insure liabilities for a particular DB scheme. In essence, the premise is that traditional insurers and actually pension schemes themselves use average mortality when assessing the liabilities for a particular scheme. However at Partnership, what we can do if we have access to individual health and lifestyle information is make a more accurate assessment of the longevity of that particular population.

What you will find, and this is particularly important when looking at small schemes where liabilities may be centred with only a few lives, is that the specific risks involved in those lives, so particular conditions that those individuals may suffer from, can have a material difference to the longevity of the scheme and therefore the cost of insuring those liabilities.

Realistically, then, how many people percentage-wise in the sort of schemes you are targeting might qualify under your underwritten process and therefore what are the potential implications in terms of cost savings for the schemes?

I think the important thing in the DB space is that it is very difficult to generalise – that said, the best indicators we have got have come from the retail space and Partnership’s research indicates that about 50 per cent of people approaching a normal retirement date can qualify under a health and lifestyle condition for some sort of enhancement. However, we have seen examples when looking at particular populations of that percentage increasing considerably. I would point you to a deal we have in the building and construction industry. For their vesting customers we can qualify easily over 70 per cent of them for an enhancement, so if you apply that experience to the DB space and you think about schemes that potentially work in the manufacturing industry or in some of the retail space for example, and when you consider we are also dealing with pensioner populations who tend to be slightly older, the qualification rates can be higher.

I think the other key point to note is that actually in the DB space when thinking about the cost savings from individual underwriting, it is not really the overall qualification rate that is the key point, it is which individuals qualify and the nature of their qualification; so for example if you have a very senior ex-executive who carries a large percentage of the liability, but he qualifies under maybe an acute cancer or a heart condition, for example, the cost saving that that can mean to the overall scheme can be material. I would point also to the first exercise that we successfully completed last year in this space; that was a manufacturing firm and we did the exercise for 18 pensioners in payment, all of whom by the way returned our simple medical questionnaire which was fantastic news. About half of those qualified for an enhancement under that exercise and that delivered approximately a ten per cent saving on the quotes that the scheme had been receiving from other more traditional providers.

So that serves to demonstrate that there is real value in schemes going through this type of exercise – it can deliver material cost savings.

So why is all this so pertinent in today’s market as opposed to say 20 or 30 years ago?

I would point initially to the Pensions Institute report that was published recently where they commented on the 1000 billion of DB liabilities that are still out there and the fact that deficits are still increasing. Couple that with the fact that some consultants – and I’d point to the likes of LCP and some of the recent research they have done - indicate that only 20 per cent of deals that come to market actually result in a transaction. What that means is there is a massive problem which at the moment isn’t being resolved necessarily by the de-risking solutions that are out there.

Also one of the main reasons why deals don’t complete is price – so as I have alluded to in my previous answer, if we can deliver a cost saving for schemes based on individual member health and lifestyle information, that hopefully will mean more schemes will actually achieve their goal of de-risking, which means that this innovation, couldn’t come at a better time for the market.

That all sounds encouraging but there are bound to be obstacles for example in relation to having to collect data from so many members etc. How have you overcome these obstacles to date?

You are absolutely right – one of the important things to note about the differences between the retail space and the DB space is that obviously in the retail space the individual has a material upside to completing the medical forms and giving us the information i.e. they get an up-lift in their pension income for the rest of their lives. In a DB context by them providing us with that information it is actually the scheme that benefits in terms of reducing the cost of its liabilities. Clearly there is a benefit for the member as well in terms of the additional security that is provided hopefully under the insurer covenant rather than the employer covenant. But the benefits are not that obvious.

So what have we done to counter that problem of capturing the medical information and engaging the member in the process? What we have done is try to simplify the process as much as possible and make it as un-invasive as we possibly can. You will be familiar that in the retail space the mechanism for collecting health and lifestyle information is a form known as CQF which is 20 pages of fairly complex questions asking people about their health and lifestyle.

Using our proprietary database and mortality set at Partnership what we have done is boil those questions down to just a handful of very simple questions requiring just yes and no answers; and what we do is work with trustees to send out that form accompanied by a letter which positions very clearly to the member why they are being asked for this information – and we are being really encouraged by the response rates we have got.

The first scheme that we have written which I alluded to earlier with 18 lives, all 18 returned the form, which is fantastic news. Other schemes which have had more members we have seen engagement levels of over 80 per cent; so I think that simplified approach works really effectively in this particular environment. And by working with trustees and their advisers we can use that approach to ensure that we can get the very best possible price for the exercise.

You mentioned that you were recently involved in the Pensions Institute report looking at the implications of applying medical underwriting to the DB de-risking market – what were the most pertinent conclusions do you think of that report?

One of the most important conclusions was that both trustees and their advisers need to acknowledge that there is this innovation in the market and about the advantages that potentially are there if they can capture the health and lifestyle information of their individual members.

So I think the most important message for trustees and their advisers is to engage in the process and look at what opportunities are out there for them to obtain the best possible price for working with the likes of Partnership in this space.

However, one of the other important points that the Pensions Institute report raises is the fact that there are probably three or four different providers out there now who are all offering individual underwriting as part of a DB de-risking exercise, however each of those providers has their own preferences in terms of how that information is sought and how it is underwritten. If we are really to create this market in a way that is open and transparent and fulfils the potential it has, I think there needs to be some consistency in terms of how the providers are looking to engage with members and capture information.

We are working very closely with stakeholders through the market to try and achieve that and from Partnership’s perspective the process that I talked about around the simplified form we are more than happy to share that information with every provider who is engaged in an exercise, ensuring there is a level playing field for everyone who wants to put forward a quite – and I think we need to have that same level of transparency for providers who are using other methods. So for example the tele-interview process which can be an effective way of gathering information, particularly from some of the individual members with large liabilities, however if all providers are going to have the confidence to engage in an exercise and put forward their very best possible price, you need that level of transparency. So, we have looked to really take up the recommendations of the Pensions Institute report and really work with the other participants in the market to achieve that goal.

How have you found the other participants reacting to that?

I think the consultancy community recognises the huge opportunities that there are in terms of cost savings of going through this exercise so they are very engaged and want to participate. Also I think in the industry there is a history of providers working together to try and build a market and to try to ensure the market develops in a consistent and coherent manner, so we found all the participants in this space very open to those discussion into how it is going to work. Clearly there are some commercial sensitivities to get over because each of us have our own preferences in how this information is collected and how we use that information however none of those barriers are insurmountable. Again I would point to the retail space and how the common quotation form has been developed and worked with to meet the needs of all providers and provide a level playing field in that market.

So I have got every expectation that we will be able to achieve the same thing in this space as well.

So what do you think is the potential size of this market and how do you see things developing into the future?

Clearly it is still a very immature market and I don’t have a crystal ball. It is very difficult to gauge how this market is going to take off and at what speed, so what I would probably point you to again is the Pensions Institute report and they look at particularly at the small schemes opportunity – the schemes that are under 400 members – and they estimate that there is about 40 billion of pensioner liability tied up in those schemes, so that’s the first opportunity for us and the other enhanced players to go for in the market.

Also, talking to some of the consultants out there, they realistically think that the individually underwritten market can take about ten per cent of the total business which is written in the DB de-risking space. So, ten per cent of that would certainly make it a very material part of that market.

So we are looking at some very big opportunities potentially?

We certainly hope so and the early indications would absolutely support that view. Both the schemes that we have written so far together with those in the pipeline suggest that it is certainly a market that has got some legs.