Assured Payment Policy (APP)
APPs at a glance
- Provide a pre-agreed series of future payments, which may be fixed or inflation-linked.
- Similar in nature to a buy-in, with the crucial difference being that APPs do not vary with longevity risk or other demographic experience. This means that we might typically see a price difference to bulk annuities of up to 10%.
- Held as a pension scheme asset.
- Can apply to any sub-set of a pension scheme’s liabilities.
- Can be used in combination with other de-risking solutions, such as pensioner buy-ins.
What do they do?
APPs can best be thought of as:
- Partial insurance: an APP locks down investment risk now, with a clear structure for adding the remaining pension-related risks in the future to “complete the bulk annuity”; or
- An investment: an APP allows a pension scheme to “build its own bond”, with tailored inflation coverage and no exposure to market and reinvestment risk, while achieving a yield in excess of gilts.
How do they work?
- An APP’s fixed or inflation-linked pre-agreed payments are designed to match all or some of a pension scheme’s liabilities.
- The trustees pay an upfront premium, as per a bulk annuity. In exchange, a payment schedule is agreed at outset, and payments are made by us to the trustees of the pension scheme as per that schedule.
- APPs can be structured to allow for conversion to buy-in or buyout, including through a series of partial conversions over time. This flexibility, and the effective and transparent conversion mechanics, create a more certain de-risking journey.