trending Market Intelligence /marketintelligence/en/news-insights/trending/XZUs2htiwy1-Dg-mbCi2Sg2 content esgSubNav
In This List

L&G's new pension insurance product cheaper than superfunds, but different

Blog

The Big Picture 2022 Insurance Industry Outlook

Podcast

Next in Tech | Episode 37: Insurance impacts on technology and vice versa

Case Study

A Prestigious Global Business School Gains a Competitive Edge

Video

S&P Capital IQ Pro | Unrivaled Sector Coverage


L&G's new pension insurance product cheaper than superfunds, but different

Legal & General Group PLC says a new pension risk transfer product it is developing will be less expensive than the solution offered by the new breed of pensions superfunds and offers a 10% to 15% discount to bulk annuities for a "typical pension scheme."

The new product, known as Insured Self-Sufficiency, or ISS, is the latest offering in the race to provide U.K. companies with ways to manage or exit the liabilities from their defined benefit pension schemes. Bulk annuities, considered the gold standard of pension risk transfer, are either sold directly to a pension scheme's entire membership in a so-called buy-out, or to a pension scheme itself to cover a specific subset of members in a buy-in.

The new superfunds aim to buy up schemes that cannot yet afford buy-in or buy-out and replace the employers' agreements to pay pensions. Superfunds can be cheaper than insurance in part because they sit outside the European Union's Solvency II insurance capital regime, so in theory have lighter capital requirements. However, two emerging superfunds — The Pension SuperFund and Clara Pensions — have yet to finalize a transaction, pending a review to be completed by The Pensions Regulator.

Superfund alternative?

Insurers have bristled at the pending arrival of superfunds, and observers have been expecting an insurer-backed alternative to emerge. But although L&G's new solution may indeed be less costly, and is a potentially useful addition to the pension risk transfer toolbox, some industry consultants do not see the offering as necessarily a direct rival to superfunds.

L&G, one of the leaders in the bulk annuities market, told S&P Global Market Intelligence via email that it has developed ISS over the past two years. The company has been engaging trustees, corporate sponsors and advisers to build awareness since the first quarter and said it has a "good number of promising active opportunities."

The solution provides a capital buffer, including additional capital from L&G, to protect against volatility in the scheme's funding levels caused by, for example, people living longer or investments performing worse than expected. The buffer is designed to be sufficient to withstand a 1-in-200-year event.

L&G describes ISS as an "enhancement rather than a replacement" of the employer covenant. The scheme's assets are managed by Legal & General Investment Management, or LGIM, and unlike a bulk annuity, the scheme retains the assets and LGIM is mandated by the pension fund trustees.

The insurer said its solution can provide value for liability tranches of £250 million or more.

Like the consolidator model, ISS is designed for pension schemes that cannot afford or have decided against buy-out. L&G also said it expects ISS pricing to generally be cheaper than consolidator pricing, adding that "anecdotal insight" in the de-risking market supports that claim thus far.

Like Clara Pensions, L&G wants its solution to act as a bridge to an eventual buyout. It said its scheme offers "a straightforward conversion" to buyout at a later date, which it added does not have to be with L&G.

Similar, but different

Alistair Russell Smith, head of corporate defined benefit at consultancy Hymans Robertson, said in an interview that "from what we've seen, the pricing of ISS is cheaper than what we would expect Clara or [Pension] SuperFund pricing to be." He added that the lower pricing "makes sense" because of the lack of a clean break between the pension fund and the employer. With ISS, employers remain on the hook if the capital buffers are exhausted, and some may be willing to pay more for a complete exit from this liability.

Gordon Watchorn, partner at consultancy Lane Clark & Peacock, agreed that ISS is "likely to be cheaper" than consolidators, with the gap depending on the nature of the scheme and its maturity. But he added in an interview: "I don't think [ISS] is a direct competitor for anything that's out there at the moment."

He said the fact that the responsibility for paying pensions would return to the employer if the 1-in-200-year capital buffer were exhausted meant that the solution "might work in certain situations but not all."

Russell Smith noted that ISS's retention of the covenant meant it was "something trustees can more readily agree to than Clara if you have got a strong covenant."

Watchorn said that on the flip side, consolidators or a buyout might be the better option where covenants are weak, as long as the scheme could pay the premium. Because of the clean break they provide, consolidators might be more suitable where exiting a scheme was necessary to facilitate a merger or acquisition, or where there was an overseas parent that was willing to inject cash to achieve a clean break, he added.

Ultimately, Watchorn said the choice of pension risk transfer mechanism would depend on the outcome for scheme members. "Just because it is cheaper than others doesn't mean it is the right solution, of course, and we have to do what's best for members and our clients," he said.