Trustees of defined benefit (DB) pension schemes could save over 10 per cent by de-risking their pensioner sections through medical underwriting techniques in the bulk purchase annuity (BPA) market, a report by the Pensions Institute has revealed.

The report found that underwriting could slash the cost of a buy-in compared to other conventional approaches to pricing: “These and other case studies in this report demonstrate that with judicious medical underwriting an enhanced BPA can offer schemes savings of about 10 per cent – much more in certain cases – relative to the cost of conventional underwriting.”

It added that individual underwriting made de-risking transaction affordable, “taking schemes closer to a fully funded position and to a final buy-out, at a time when they are suffering from increasing liabilities due to economic conditions”.

The report featured a number of proposals, such as regulation of the BPA market to be taken on by Financial Services Authority and The Pensions Regulator, that consistent data for the enhanced buy-in market is developed and that there is flexibility in the way insurers can collect data on members’ health, so that schemes can benefit from whole-of-market bidding processes.

It also proposed that trustees seek expert advice about the impact of the insurer’s covenant on the scheme’s financial position and that stakeholders and regulators should produce clear guidance for trustees, sponsors and their advisers to ensure best practice is extended to the smaller schemes.

The authors recommended that stakeholders and regulators work together to establish a clear regulatory framework and a code of practice, to ensure that the market reaches its full potential.

The Pensions Institute senior visiting fellow Dr Debbie Harrison said: “This is a major development in the de-risking market. Trustees and scheme sponsors depend on securing affordable buy-ins in order to reach their ultimate goal, which is to transfer all liabilities to insurance companies. The introduction of medically-underwritten buy-ins will help them to reach this goal more quickly – a development that should be welcomed by stakeholders and regulators alike.”

According to the report, the enhanced bulk buy-in market currently focuses on smaller schemes with up to 400 pensioners. There are more than 5,000 schemes in this market, representing about 350,000 pensioners in aggregate and assets under management (AUM) of about £40 billion. This represents just over 10 per cent of the AUM in relation to pensioner sections in the total market, indicating that if the enhanced bulk buy-in can be developed to cater for all sizes of pensioner sections, the market would represent AUM of about £380 billion.

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