From your point of view, what have been the industry and policy highlights of the past 30 years?
It's not an exaggeration to say that the UK pensions industry has undergone a remarkable, if not unfathomable, amount of change over the past thirty years. In 1995, Defined Benefit (DB) pensions were provided by most companies, and DB schemes were, for the most part, still open to new members. Investment strategies focused on growth assets, like equities, with minimal risk hedging in place. For many companies, a DB pension would have been considered a standard employee benefit, a view underpinned by a confidence that assets would outperform liabilities over the long-term.
Against this backdrop, insurance companies played a specialist role. When a sponsoring employer became insolvent, an insurer secured what benefits it could using the assets available. As such, the UK buyout market remained small at around £1-2 billion annually.
A sea change occurred in 2004 when both new corporate accounting standards and pensions regulation were introduced. A key part of the new pension regulation involved establishing the Pension Protection Fund to serve as a ‘lifeboat' for schemes if their sponsors became insolvent. The cumulative impact of new regulation, new accounting rules and increasing longevity led to a widely held view that DB schemes were becoming too onerous for their sponsors and that the previous belief that assets would outperform liabilities was far more difficult to deliver than expected. This view was borne out in the following two decades when trustees and companies worked together to repair deficits and improve the risk management of their schemes. It was against this backdrop that the modern buyout, or what we now call the Pension Risk Transfer (PRT) market, was born. How the market has evolved and grown has been astonishing.
The fact that over £285 billion of members' benefits have been secured by UK PRT providers in the past decade alone, and the positive outcomes we've collectively delivered for companies, trustees, and members - as well as the £178 billion UK annuity providers have invested in socially and economically useful assets - firmly positions the industry as one of the great success stories in financial services.
Where are we today in terms of delivering great outcomes to members? Where do we, as an industry, need to do more?
In any PRT transaction, the interests of pension scheme members are front and centre. The member is the ultimate beneficiary of the increased long-term security conferred by the movement of their pension scheme into the prudential, insurance-based regulatory environment. In this regard, any innovation that facilitates a smoother transaction process or increases choice and flexibility for trustees is positive – and there have been many such innovations over the years.
At L&G, delivering exceptional customer service is at the heart of our PRT business, supported by our multi-award-winning in-house administration teams based in Cardiff, Hove, and our newly established Glasgow office, marking an industry first and strengthening L&G's presence in Scotland's actuarial and service hub. This in-house model allows for direct relationships with policyholders and full oversight of service quality. We are paying pensions to over 700,000 people in the UK, and this responsibility is the lynchpin of everything that we do within our PRT business.
As demand from pension schemes has increased, sustainable growth remains a key priority. I'm sure we're not alone at L&G in investing in our people, processes and technology to build for the future. This includes expanding customer service teams through external hiring and an apprenticeship programme launched in 2022, to help address the industry's DB knowledge gap.
Technological innovation is also central to L&G's strategy, involving the ongoing development of systems and tools, including L&G's Flow platform for smaller schemes. Flow supports end-to-end transactions from guaranteed pricing through to buyout, ensuring post-sale sustainability.
At one of our recent industry events, we asked our audience of advisers, lawyers and reinsurers what they viewed to be the foremost challenge facing the PRT market over the next five years. The majority responded with "pension scheme administrator capacity", followed by "insurer onboarding capacity".
A significant amount of work is required ahead of a buyout transaction, with areas such as GMP equalisation adding to the pressure on administrators already working at capacity to complete their business-as-usual responsibilities. It is important to ensure this work is done as efficiently as possible so that scheme administrators and PRT providers can continue to provide members with high levels of service.
As the DB market faces increasing pressure on administration and member services, L&G is keen to collaborate with stakeholders to drive efficiencies and enhance the overall buyout process as transaction volumes continue to grow.
Looking to the future, what are the key areas in which you expect pensions to develop to meet the need of members? How can those in the industry play a role in building a pensions system fit for the future?
The PRT market is currently undergoing a period of higher demand, and our view at L&G is that £1 trillion of pension liabilities could be secured with insurers globally over the next decade.
In the context of this increasingly busy environment, at an individual PRT transaction level, direct conversations between insurers and trustees can help the insurer to better understand the specific trustees' requirements and deliver a proposal that meets their and their scheme members' needs. We are grateful for the relationships that we have with the advisory and trustee communities and how these relationships contribute to the success of our industry.
Another key area of focus will be how insurers continue to evolve their investment strategies to deliver attractive pricing whilst generating stable returns that match the pension benefits secured. One of the ways we do this is allocating a portion of the portfolio to productive investments, such as investments in infrastructure, housing and urban regeneration. The benefits here are twofold: stable long-term cashflows that contribute to the payment of pensions, and investment in socially beneficial assets that meet tangible public needs. The latter demonstrates that insurers are playing a leading role in channelling pensions into productive investments and supporting the Government's growth agenda.
The role of the DB pension within the larger pensions landscape should also be considered. Higher gilt yields in recent years have helped to improve funding levels, with approximately 75% of DB schemes now in surplus on a low-dependency basis. Many trustees and sponsors are considering how to best make use of this surplus. One option is a solution offered by L&G: the transferral of DB surplus to DC schemes. Such transfers help sponsors reduce their ongoing contribution costs or increase contributions to their DC schemes, strengthening employee pension outcomes across the wider pensions system.
