Overview of the pension risk transfer market

Transcription

1 August 2017 Overview of the pension risk transfer market Celebrating 30 years Our market update for the first half of 2017 details our new business volumes plus market activity and trends.

2 Market overview 2017: LOOKING BACK 2017 marks Legal & General s 30th year in the bulk annuity market. Much has changed since A market that began by providing a solution for pension schemes at the end of their lifecycle has today grown into a multibillion pound a year industry that partners with pension schemes at all stages of their de-risking journeys. More than 90 billion of defined benefit pension obligations has now transferred from company balance sheets to insurance companies through bulk annuities, with buyout becoming the desired destination for many pension schemes and the companies that sponsor them. Legal & General has had a positive start to billion of bulk annuity business was written in the first half of 2017, maintaining our strong market share. This compares to 3.6 billion written in the first half of 2016 (which includes the Aegon back-book transaction of 2.9 billion), and 1.1 billion in Excluding annuity back-books, market volumes for the first half of 2017 have been broadly in line with the same period in Based on publicly announced transactions, the total volume of business written is just under 3 billion. However we expect the actual total, allowing for unannounced transactions, to be materially higher. The market has been dominated by schemes looking to de-risk by securing a tranche of liabilities, rather than buying out all of the members at once, with an average transaction size across the market of less than 200 million. Our success in the US has continued into 2017 we have written over $140 million of business during the first half of the year and the pipeline for the second half looks strong. The longevity insurance market continues to remain quiet so far this year three transactions have been announced covering 1.4 billion of liabilities. This includes an 800 million LGAS pass-through longevity insurance that we completed with a UK pension scheme. We continue to see significant interest in our LGAS pass-through and small scheme longevity solutions from pension schemes looking to insure their longevity risk as a first step to eventual buy-in and buyout. NEW BUSINESS VOLUMES During H we wrote 15 UK bulk annuity policies and received 1.5 billion of premium in respect of new business, including balancing premiums. This compares to 10 bulk annuity policies and 3.6 billion of premium received during H Bulk annuity sales H m- 100m 100m- 1,000m Total size ( m) ,079.0 Average size of quote ( m) Total number of transactions : LOOKING FORWARD We expect the bulk annuity market to remain vibrant for the second half of 2017 with growing demand from pension schemes materialising into increased quote activity. Healthy insurer and reinsurer appetite has generated very competitive pricing in the first half of the year and we fully expect this attractive environment for pension schemes to continue. Below we have detailed some trends that we believe will continue into the second half: Partnering with an insurer to meet a price target. Pricing bulk annuities has become ever more complex over the last few years, primarily driven by the increasing use of reinsurance and direct investments by insurers. Working with one or a select number of insurers will allow schemes to monitor pricing more accurately and take advantage of favourable pricing opportunities. Our successful partnership this year with a UK scheme, which we discuss later, is a practical example of how we can work closely with schemes and their advisers to help achieve their objectives. Opportunities for small sized schemes. Recent research has highlighted the significant number of small schemes within the industry, with the average pension scheme in the UK estimated to have around 200 million of assets. Legal & General has always supported schemes of every size and we have completed a number of transactions with a value of below 10 million this year, the smallest being 1 million. We believe that simplified processes, standardised documents and pre-agreed terms will allow a greater number of small schemes to access insurance solutions more cost effectively. Long term security is important to trustees. Trustees are looking to seek comfort that the organisations they approach for bulk annuities, whatever their size, are likely to remain active and committed to the market, in the long term. This is becoming more prominent in an environment of increased uncertainty and anticipated life sector consolidation as the UK government negotiates withdrawal from the European Union. 2 3

3 Case study THE BENEFITS OF EARLY ENGAGEMENT AND CLOSE COLLABORATION We are increasingly seeing pension schemes choosing to approach insurers on a singular basis, or as part of a selective panel. In addition to the price of the bulk annuity, we are seeing trustees focus on a range of factors. These may be traditional considerations, such as financial strength, or may relate to the ability of the insurer to withstand market shocks. They can also relate to the more day to day aspects of servicing the bulk annuity, such as experience, commitment and administration capabilities. By partnering with an insurer (either on a sole or panel basis) the insurer receives a higher degree of certainty that a bulk annuity policy will be secured. The following example illustrates how this certainty can deliver the desired result for the scheme. A recent buy-in completed by Legal & General followed this framework. When the trustees approached the market for buy-in quotations, we were not able to meet their price target, but they were attracted by our experience and commitment to the market. We agreed to work with them on a sole insurer basis for six months under an innovative approach that gave us the transaction certainty that allowed us to invest in refining our pricing and ultimately meet their target. During the six month exclusivity period we were able to agree contractual terms early on so that we were ready to take advantage of positive movements in pricing when they presented themselves. We were also able to use the certainty of the structure to source investments appropriate to the liabilities and to negotiate reinsurance pricing. The chart below shows the movement of our pricing over the six month exclusivity window relative to the scheme s price target, which is indicated by the bottom line. As we were working through the pricing during the initial period, there were significant movements in market conditions, initially towards the price target, but then Legal & General pricing relative to trustee target further away. The significant gains which moved us toward the trustee target have been highlighted on the graph. These gains which eventually allowed us to reach the trustee target can be attributed to changes in our investment strategy and reinsurance pricing. Partnering with an insurer to meet a price target January 2017 June 2017 Two material gains occurred due to changes in our investment strategy. Specifically, we were able to source and (critically) then warehouse higher yielding and better matching investments over the course of the exclusivity period because we knew the trustees were ready to transact if we achieved their target. The two other significant gains came from negotiating with reinsurers to improve our pricing. The final gain seen on the chart was achieved due to the proximity to the price target and a transaction. This meant that this opportunity became a more compelling proposition for reinsurers and we were able to negotiate the remaining benefit required to be able to secure a buy-in for the scheme. 4 5

4 Introducing Contact us Pretty Sagoo Pretty joined Legal & General as Head of Strategic Business in May of this year. Our Strategic team works with pension schemes that have assets over 1 billion. Pretty joined from Deutsche Bank where she most recently led the Insurance and Pensions Solutions team. Prior to this Pretty held roles at AXA, Sun Life and Goldman Sachs. CORE BUSINESS TEAM Costas Yiasoumi Head of Core Business costas.yiasoumi@landg.com Frankie Borrell frankie.borrell@landg.com Julian Hobday julian.hobday@landg.com Gavin Smith gavin.smith@landg.com A word from our Managing CLIENT SOLUTIONS TEAM Russell Lee Head of Client Solutions russell.lee@landg.com STRATEGIC BUSINESS TEAM Pretty Sagoo Head of Strategic Business pretty.sagoo@landg.com Ashu Bhargava ashu.bhargava@landg.com Matt Wilmington Over the past 30 years Legal & General has been very successful in a market that has changed enormously. The first half of 2017 has seen a competitive pension risk transfer market with attractive pricing for schemes. The pace of solution innovation is truly impressive and we look forward to more opportunities to help companies settle their pension liabilities and improve benefit security for members. Chris DeMarco, Managing, UK Pension Risk Transfer ORIGINATION TEAM matt.wilmington@landg.com John Towner Head of Origination john.towner@landg.com Aysha Patel Origination aysha.patel@landg.com We may record and monitor calls. If you are contacting us by please remember not to send any personal, financial or banking information because is not a secure method of communication. 6 7

5 CONTACT US Important information This is not an advert for pension members or employees. It is intended for professional financial advisers and pension trustees and should not be relied upon by pension scheme members, employees, or any other persons. Legal & General Assurance Society Limited. Registered in England and Wales No Registered office: One Coleman Street, London EC2R 5AA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Q SUB