Pension Increase Exchange

Liability management exercises can be an effective tool to help pension scheme sponsors and trustees reduce the risk in their schemes as well as offering members more choice and flexibility. A Pension Increase Exchange (PIE) exercise offers members the choice of exchanging future increases on their pensions for a one-off uplift within the defined benefit (DB) scheme. The uplifted pension does not then attract any further increases. We work with clients through all stages of a PIE project, including design of the offer, communication of the offer and financial impact of the acceptance rates.

This option can be offered to current pensioners as a bulk exercise, to future retirees at the point of retirement or as part of an exercise to communicate the scheme’s early retirement options to deferred members. PIE options are popular with members who appreciate a higher pension in the short term. In particular, if offered at the point of retirement, they allow members to receive more pension in the first years of their retirement when they are likely to be more active. The popularity of level annuities amongst people with defined contribution (DC) pension savings indicates that flexibility over pension increases might also prove appealing to some DB scheme members.

There are many potential attractions with making a PIE offer to pensioners:

• Makes it easier to purchase an annuity in the future, particularly if the scheme provides pension increases in line with Irish price inflation (as insurance companies find it difficult to hedge this liability)
• An additional option for pensioners
• Reduces risks in the pension scheme as more pension is payable in the short term
• Reduces the risks to the pension scheme of inflation being higher than expected if the scheme currently provides pension increases in line with inflation.

It is important when implementing a PIE exercise that pensioners who are assessing the offer avail of Independent Financial Advice or guidance before proceeding with choosing to avail of the offer. Clients should also consider the cohort of pensioners that should be communicated with as older pensioners may be deemed to be “Vulnerable Customers”. Willis Towers Watson can facilitate provision of advice or guidance to pensioners through our large team of Independent Financial Advisors.