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Time to change GAR for a sportier model

Is it ever worth giving up a good guaranteed annuity rate? At Pearl Group, we think it sometimes can be, if the compensatory enhancements to other aspects of the policy are sufficiently attractive. But are our customers of a like mind? To find out, we are writing to around 50,000 customers to find out if there is enough appetite for us to develop a formal exchange scheme.

The customers are all holders of what were originally Sun Alliance traditional with-profits individual pensions ­– mainly s226 plans, s32 transfer plans and personal pension plans issued between 1981 and 1994. What we are proposing is a significant uplift to current policy values and significan­tly increased future equity and commercial property exposure in exchange for the GARs.

Each customer will receive a letter in October with an outline of the proposal, including a key facts table showing the aims and risks of the prop­o­sal. The mailing pack will also contain fuller details in the form of a questions and answers book­let and, cruc­ially, a personal illustration showing projected benefits with and without the suggested chan­ges.
The mailing pack was desig­ned with the help of customer focus groups and we believe it will highlight in a balanced way the benefits and risks associated with our proposal.

We consider the personal illustration to be the most important part of the pack as it answers the key question: “How would your suggestions affect me?” This was the most common question from an earlier telephone survey we carried out about our idea.

Table 1 contains actual figures from the personal illustration for a single-premium personal pension plan for a man with a retirement age of 65 in 2023 which commenced in 1990 before the changes we are suggesting.

It can be seen that the policy­holder has no expectation of receiving any more than the guaranteed minimum benefit at retirement, irrespective of future investment returns. This is due to this policy being invested entirely in fixed-interest securities closely matched to the retirement date.

Table 2 shows the equivalent values after the changes we are suggesting.

Typically, illustrations will show an increase in the immediate policy value (transfer value) of between 50 and 150 per cent, an increase in the mid projected retirement fund and mid maximum tax-free cash of between 90 and 250 per cent and an increase in the mid pension of between 25 and 125 per cent.

The increase in the immediate policy value is due primarily to the addition to asset shares representing an amount of compensation for the loss of the GAR. An increased current asset share is very likely to lead in due course to an increased retirement fund. Higher equity backing can be expected to further increase the projected retirement fund, over the longer term. Taken together, these two enhancements are expected, in most future circumstances, to del­iver an increase to policyholders’ eventual retirement funds which will more than offset the difference between GARs and standard annuity rates.

It is also important to note that, as can be seen from the guaranteed column, the guaranteed minimum retirement fund will remain unchanged.

Natural questions from policyholders will be: “How likely is it that I will actually experience benefit improvements as good as the mid projection? And what is the risk that the outcome might be more like, or even worse than, the low projection?”
To answer this, we have obtained permission from FSA to use a purpose-built stochastic illustration instead of the standard FSA basis.
This has been designed for Pearl by consulting actuaries Towers Perrin. It allows for variations in future investment returns, interest rates and longevity expectations, all of which are key factors in deter­mining the size of the event­ual pension in the absence of a GAR. The actual benefits are equally likely to be higher or lower than the mid projections, whereas there is only a 10 per cent chance that benefits will be lower than the low projection or higher than the high projection.

Another question some policyholders might be asking is: “Is now a good time to be increasing equity and prop­erty backing?”
We can respond to this question from several angles. First, it is clearly a better time to be investing in shares and property than 12 months ago. Second, the earliest we could implement a scheme of the type we are now seeking opinions on would be January 1, 2010. We are therefore not proposing to increase the backing immediately and markets may well have stabilised by the time we do.

Third, and perhaps most important, only policies with more than 10 years to run to their retirement date would be included in any scheme. We consider this the minimum period to invest in equities and property if a high level of certainty is required that the result will be a better return than from fixed-interest stocks. We are therefore not writing to policyholders with retirement dates before 2020.

What sort of an increase in equity and property backing is being proposed? Many single-premium policies, because they have a very generous guaranteed minimum maturity value, have asset shares currently invested wholly in fixed-interest stocks. For them, the change would be very significant – to 45 per cent equity, 25 per cent property and 30 per cent fixed interest.

The majority of the policies which would be included in any scheme are of this type. Some policies do, however, currently have an equity backing of 25 per cent plus 25 per cent in property and 50 per cent in fixed interest. For them, the change to the above asset mix would be of less impact but, nevertheless, still capable of adding value over time.

We will also continue to apply lifestyling for policies once they have less than nine years to run. This sees the equity and property proportions reduce steadily to half the above levels by the final year. This brings increasing stability to policyholders’ projected retirement funds. The increasing fixed-interest proportion also provides increasing protection against falling annuity rates, as the stocks held will be those typically used to drive annuity prices. This helps to mitigate removal of the GAR.

We are asking policyholders to reply by the end of October. If there is strong support, Pearl is likely to propose a formal scheme in 2009. What sort of support would we need? Well, if we are to successfully include all 50,000 policyholders, we would need to implement a scheme of arrangement under part 26 of the Companies Act 2006. This requires the support of at least 50 per cent of policyholders who voted by number and, more important, the support of at least 75 per cent of policyholders who voted by value of the GAR which would be forgone.

If we went ahead with a formal scheme in 2009 and we got the required level of support, then the changes would apply to all 50,000 policies, whichever way they voted and, indeed, even if they did not vote at all.

It is not unreasonable to ask why we would not intend to allow policyholders to opt out of the changes. This is because the scheme has been designed to have a neutral expected financial impact on Pearl’s shareholders. If an opt-out was offered, it is possible that it would be exercised by a subset of policyholders who were unrepresentative of the whole population, making the financial impact of the scheme unpredictable.

Nevertheless, we do recognise that some policyholders may be planning on retiring before the date stated in their policy. If their actual intended retirement date was sooner than 2020, the additional risk from the increased equity backing might not be appropriate for them. We therefore intend to allow these policyholders, if they want, to change the retirement date in their policy before the scheme goes ahead, so that they would be excluded from the scheme.

In addition to an expected increase in retirement benefits, our suggested changes provide additional benefits for some policyholders. Policyholders who are considering transferring their accrued benefits to another pension arrangement would be able to do so with an increased transfer value, effectively compensating them for a GAR which they would otherwise have had to give up for no value. A similar benefit applies to those who are interested in switching from with-profits to unit-linked in their existing policy.

Some policies, particularly contracted-out policies, offer a GAR only at certain retirement ages. At present, if the holder of such a policy wants to retire at a different age, he or she has to give up their valuable GAR. If our proposal goes ahead, these policyholders would have financial flexibility about when to retire or, from this month, transfer to a self-invested personal pension.

Policyholders who might be eligible for enhanced annuity rates also stand to benefit more than others. If, for example, they could obtain an enhanced annuity as good as the GAR given up, then they would, in effect, have a “free” enhancement to asset share and an increase in equity backing.

We draw out these special circumstances, and others, in the questions and answers booklet in the mailing pack, copies of which can be found on our website

Pearl is committed to seeking out opportunities to improve the performance of the policies in all the companies that it owns. These suggested changes are just one mani- festation of that philosophy, one which we hope both policyholders and their advisers will support. Most single-premium policiesMost regular-premium policies

All policies

current asset mixproposed asset mix


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