Profiling pensioners in buy-outs

November 6th 2006 saw the launch of a year-long co-operation between Richards Consulting and Experian plc. Using Experian's iCoder database, companies can now profile individual pensioners for both socio-economic group and likely marital status. This database thus enables companies operating in the bulk buy-out sphere to use more science and less guesswork in pricing the two main demographic risks in writing buy-out business.

After gender, socio-economic group or lifestyle is the most important variable in determining current life expectancy, and therefore annuity cost (Source: Richards and Jones, "Financial aspects of longevity risk", SIAS 2004). In the bulk buy-out market, the insurer or reinsurer only has one chance to correctly assess a scheme's socio-economic make-up and price it correctly. Hitherto, this assessment has been made on the basis of pension size, or sometimes postcode. Now a database is available which enables the identification of actual individual households, thus offering greater accuracy in socio-economic risk profiling.

Another key pricing assumption for bulk buy-outs of defined-benefit pension schemes is the proportion of annuitants actually married. Most schemes provide dependent's pensions, but few schemes actually keep or record who is actually married. As a result, pricing a bulk scheme usually involves making a guess as to the proportion of lives with a dependent spouse. This is a material assumption, as spouse's benefits add around 12% to any annuity price, so each extra 10% in the proportion married will add 1.2% to the total price. Previously, this assumption had to be guessed by the pricing actuary. Now, however, this database allows you to model who is --- and who is not --- likely to be married and therefore carry the risk of needing spouse's benefits.

If you would like more details, please download the brochure or visit the Experian micro-site. Alternatively, call Justin Armsworth on 0131 228 7927 (email Justin.Armsworth@uk.experian.com), or speak to Stephen Richards at one of his forthcoming speaking engagements.