How schemes can benefit by engaging with insurers directly

Schemes must not be afraid to reach out to insurers directly, writes Russell Lee.

What's happened?

A sustained period of low gilt yields has eroded many pension schemes' funding positions and led to sponsoring employers plugging the gaps. As schemes move along the journey towards full-funding, trustees are starting to think about taking risk off the table, often through a buy-in or buyout. As a result the last few years have seen more de-risking transactions in the market than ever before, with 2014 having the highest total transactions on record.

Although volumes were the second highest ever in 2015, it was a quieter year in comparison, as insurance companies geared up for Solvency II which came into effect at the start of 2016. These new regulations require insurers to abide by more stringent capital requirements which means that insurance companies must now hold more capital to back the buy-in and buyout business that they write with pension schemes.

If insurance companies didn't do anything in response and continued to price in the same way they did prior to the introduction of Solvency II, then the costs of de-risking would go up.

Fortunately, however, many insurance companies have been looking for innovative new ways to create bespoke de-risking strategies, which still fall within an appropriate pricing range for pension schemes.

What does this mean for trustees?

Specifically - we are looking at deconstructing the particular areas of value that a buy-in creates, such as economies of scale, administration and access to credit selection, and separating these out to offer a pick 'n' mix approach where trustees can find a solution that best works for them.

As Solvency II comes into force this bespoke approach will become more important as some of the risks that life insurers have traditionally held after a de-risking transaction may become more expensive from a capital perspective. If some of those risks can be kept within the scheme then trustees will be able to bring the cost of a de-risking exercise down significantly.

Bespoke strategies have grown in popularity of late. One popular example has been to take a medically underwritten approach to bulk annuity purchases.

However, the scope for taking a truly tailored approach is limited unless trustees and their advisers deal with insurance companies directly to craft a buy-in arrangement that both meets the scheme's de-risking objectives but also its pricing requirements.

What next?

Schemes shouldn't be afraid of reaching out directly to insurers. We are already seeing an increase in the numbers of trustees taking this approach and we are expecting it to increase further.

We are gearing up for better engagement with schemes on a bespoke basis, in order for us to share our ideas with them and put together arrangements that suit us in terms of the risks that we're well positioned to take under Solvency II, while more importantly helping the pension scheme better secure and protect its members' benefits through insurance at an affordable cost.

When a scheme comes to us we will look to understand its circumstances, what it wants to achieve, which elements of a de-risking solution it might want to retain, and which elements it can transfer to us.

By following this approach we can create a package that helps take risk off the table cost-effectively rather than having something that looks too expensive when you put it all together as a standard buy-in.

Schemes should also think about engaging earlier in the journey. De-risking is no longer something schemes should be thinking about doing in 30+ years when they are fully funded. New strategies such as accelerated buy-ins or longevity top slicing mean that trustees can find creative ways to take aspects of their risk off the table far earlier on and in a more holistic way.

Trustees' and sponsors' expectations of the cost of a buy-in or buyout are often based on estimates provided by scheme actuaries. While these estimates can be good approximations, we often find that the cost of a buy-in or buyout can be significantly less than expected when pursuing a more proactive approach and for this reason, we would encourage them to get in touch. We are always happy to discuss how we can help put in place an arrangement that best meets stakeholder objectives.

We are authorised by Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Legal & General Assurance Society Limited. Registered in England and Wales No. 166055. Registered Office: One Coleman Street London EC2R 5AA.

Russell Lee

Article written by:

Russell Lee

Head of Client Solutions

0203 128 1130