How an insurer's stance on sustainability affects bulk annuity provider selection

Weighing up trustees’ priorities on net zero in bulk annuity transactions

clock • 2 min read
Mitul Magudia: Differentiating between insurers’ ESG strategies can be a time consuming and complex task.
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Mitul Magudia: Differentiating between insurers’ ESG strategies can be a time consuming and complex task.

Sustainability issues, net zero, and ESG factors have become increasingly prominent in trustees’ governance procedures, with requirements for schemes over £1bn to report on Taskforce on Climate-related Financial Disclosures (TCFD) and setting targets on the level of emissions in portfolios.

These requirements have become noticeable in the bulk annuity market as ESG questions are now routine in any request for quotation, pitch meeting, or survey by industry consultants.

This raises the question of an insurer's stance on sustainability when trustees are selecting a bulk annuity provider. Unsurprisingly, the predominant factor driving trustees' decisions are still overall price and a preferred ESG outlook is unlikely to make up for a 2-3% swing in premium - £20-£30m on a £1 billion deal - as trustees seek to secure members' benefit.

Deal specific factors on complex cases, such as dealing with illiquid assets or price lock structures, can give an insurer an edge.

But administration capabilities, member experience and member option factors also remain a crucial factor to decision making when quotations are tightly grouped and it is at this point we would expect an insurer's ESG process to come into consideration.

The weighting given to sustainability will, of course, depend on the trustees' priorities and scheme background.

As an example, charities typically give more focus to it and it would not be unusual for them to go into a deeper dive on sustainability requirements than a typical scheme.

Schemes in surplus, which are able to secure full level of benefits without recourse to the sponsor, will also have more flexibility to choose based on sustainability requirements, albeit the trade-off of doing so could come against discretionary increases to members or a return of surplus to the sponsor. In a busy market it is important that consultants and insurers work together to provide up to date ESG information to trustees.

Feedback loop

All insurers have an ESG strategy and differentiating between them can be a time consuming and complex task.

However, in recent years investment consultants have grown their expertise in this area and it is likely that trustee understanding of the different approaches will continue to increase, raising awareness of the benefits of insuring with one insurer over the other.

This also provides the opportunity for a feedback loop for insurers to understand where their approach may differ from market standard.

Mitul Magudia is deputy chief origination officer at Pension Insurance Corporation

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