Insurers are set to face a "flood of requests" from pension schemes for buy-in contracts to be restructured to allow for guaranteed minimum pension (GMP) equalisation, Aon warns.
More than £50bn of buy-ins have been agreed in the market over the last 10 years, and the majority of them include ‘future-proofing' clauses to allow schemes to update the structure of benefits insured.
Just a handful of schemes had already equalised GMPs before conducting a buy-in, and both schemes and insurers will need to make a concerted effort to ensure their policies now reflect the recent Lloyds judgment.
Speaking to PP, Aon risk settlement partner Mike Edwards said how this exercise is carried out could impact insurer capacity - but schemes may simply do this at the point of transitioning to buyout, in a staggered approach.
"If all of those schemes wanted to look at [updating their contracts] at the same time, then clearly there could be an impact on insurers' pricing resources, their operational resources," he said.
"In practice, we would expect any restructuring of policies across the market to take place over an extended period of time, and actually for many of them it will likely be at the point of buyout."
He added schemes could run a "mismatch" policy in terms of what is insured and what benefits are paid to members in light of GMP equalisation, noting there is "precedent" in terms of other complex benefit features.
It will be a scheme decision on which method is used to equalise GMPs, he said, with the firm's clients roughly split between being poised to undertake the dual record approach, or the conversion method - and insurers are not currently insisting on either.
Aon GMP equalisation team head, and principal consultant, Tom Yorath said these "flexible provisions" in contracts have become "commonplace" and this would not change, despite the ruling, and therefore schemes could still rely on them.
"[Schemes must] make sure that you've got sufficient flexibility to then later agree something sensible on GMP equalisation with the insurer," he said.
"Start to get a handle on what the potential costs of GMP equalisation might be because, if you're going to bake it into the contract, understanding what the financial impact is going to be is quite important."
The number of defined benefit (DB) scheme members with benefits protected by an insurer will double by the middle of the decade, according to Lane Clark & Peacock (LCP).
Aviva Life & Pensions has concluded an £875m buy-in with its own staff pension scheme, following on from a similar transaction last year.
Just Group has completed a £74m pensioner buy-in with the UK pension scheme of a US-listed engineering business.
The Smiths Industries Pension Scheme has secured a £146m buy-in with Canada Life in its fourth bulk annuity and its sponsor’s tenth overall.
The Prudential Staff Pension Scheme has entered into a £3.7bn longevity swap with Pacific Life Re, insuring the longevity risk of over 20,000 pensioners.