2017 marks Legal & General's 30th year in the bulk annuity market. In this article Ashu Bhargava discusses how pricing has evolved in that time, ultimately giving pension scheme trustees greater opportunities than ever to de-risk.
The word 'opportunity' has maritime origins, referring to sailors navigating ob portus - in the direction of the port - while harnessing the best combination of wind, current and tide. This seems an appropriate analogy for pension scheme trustees navigating the de-risking landscape; often ultimately targeting the safe harbour of a buy-in and buyout provider.
Much has changed since Legal & General entered the bulk annuity market in 1987. The past decade has seen market volumes swell to unprecedented levels and there are now more options for pension schemes to take risk off the table than ever before. Gone are the days of one size fits all solutions: advisers have developed advanced tools for trustees and insurers now deliver highly bespoke solutions and pricing intended to help pension schemes make it to dry land.
So what are these developments and why do they matter to your journey?
Bulk annuity pricing has become far more dynamic in recent years, as investment strategy, reinsurance and market monitoring play an increasingly important role. For this reason, we frequently emphasise the importance of early engagement. In our experience we have found that trustees who engage with advisers and insurance companies at an early stage often achieve their de-risking objectives ahead of schedule.
New investment opportunities
Insurers are what are termed buy to hold investors. As we hold long term commitments to our policyholders, we are looking for investments that match the pension obligations we will pay out in the future. The advantage of this is that we don't see asset illiquidity in a negative light like other investors might.
With this in mind, in recent years we - like others insurers - have increased our interest in 'slow money' assets, such as infrastructure, housing and urban regeneration. These low risk assets pay an additional return because they are illiquid: an extra return which can be used to drive down the premium trustees pay.
Each asset opportunity is as unique as the last though: so the task of matching the right asset with the right pension scheme becomes key. Without an insurer having a granular understanding of your scheme's expected cashflow profile, ideal opportunities may be missed. When an insurer is confident that sourcing a particular real asset will lead to a transaction, we will often go the extra mile to find that real asset.
Reinsurance can also help to increase affordability for trustees and sponsoring companies, because reinsurers are often natural holders of longevity risk. There is significant competition and appetite amongst global reinsurers to assume longevity risk to balance their significant holdings of mortality risk. This can sometimes create opportunities for pension schemes with member profiles that reinsurers may find particularly attractive at a specific time.
Buy-in and buyout pricing is also driven by financial market conditions, principally credit yields and inflation. As markets move, so too will the buy-in or buyout quote you receive. Therefore transacting with the right insurer on the right date can be far more beneficial than transacting with the best priced insurer on a set date.
This means that regularly monitoring your scheme's funding position and keeping a close eye on market conditions can help trustees to capture opportunities when they arise. ICI's £750m bulk annuity with Legal & General last year is an excellent example of this principle as the trustees were able to take advantage of favourable market movements following the EU referendum, which significantly narrowed the gap between the funding basis and the bulk annuity premium.
This serves to underline how the de-risking market has become far more nimble and innovative in recent years. Early engagement and strong collaboration can create opportunities for trustees and their sponsors that wouldn't have otherwise been there. As American author, H. Jackson Brown Jr. once put it:
"Opportunity dances with those already on the dance floor."