The world is getting greyer

Our businesses work together to help pension schemes build more secure futures

The legacy of DB pension schemes

The key objective for the trustees of defined benefit (DB) pension schemes in the UK is to pay benefits on time and in full. Pension schemes invest contributions from employers and employees, to close any funding deficits and pay out pensions. In the UK, the total deficit of DB schemes covered by the Pensions Protection Fund reached £266.3 billion at the end of December 2014. Pension deficits arise primarily due to increasing longevity, falling interest rates, increasing inflation and falling equity volumes.

We can help clients diversify assets, match liabilities and move to buyout, all under one roof.”

Mark Zinkula, CEO, LGIM

Difficult choices to make

In the UK, just three FTSE 100 companies now have DB schemes open to new members. There’s a continuing trend for schemes to close and be replaced by defined contribution (DC) schemes, which means that we are seeing fund outflows from our DB business. UK DB pension schemes are increasingly moving to de-risk their investment strategies wherever possible and consider two eventual outcomes. They can adopt a low-risk ‘self-sufficient’ investment strategy, focusing upon paying benefits and generating a modest return. Alternatively, they can consider a buyout strategy, where scheme liabilities and risk are transferred to an insurance company.

Our derisking solutions

As an investment manager and as an insurance company we can help our clients navigate their journey to the eventual outcome. We offer a wide range of growth investment strategies which can help close the funding gap and de-risk investment strategies, which ultimately target the ‘endgame’. Our investment management team and our bulk annuity team work closely with trustees and employee benefit consultants so that we can understand our customers’ objectives and help them achieve them.

We help scheme trustees to pay pensions on time and in full.”

Worker hangs up a "For sale by auction" sign (photo)

Leading the market in liability driven investments (LDI)

We’ve built up a market leading position in LDI, accounting for 44% of the UK DB market. For the second year running, KPMG have calculated that we are the largest LDI manager in the UK across both pooled and segregated mandates. This is testament to our commitment to providing UK pension schemes with investment solutions that support them throughout their derisking journey.

In 2014, we continued to innovate, focusing on three main areas:

  • Enabling a broader range of schemes to access LDI solutions and manage their risks
  • Enabling a liability aware approach to credit investing
  • Supporting schemes in preparing for the next stage of LDI

We’re very pleased with the insurer’s expertise, agility, pragmatism and level of service, all of which contributed to the success of this buyout.”

Neil Marchuk, Chair of the TRW Trustee Board, talking about Legal & General’s TRW transaction.

We’ve launched Buyout Aware funds which are specifically designed for pension schemes targeting a buyout ‘endgame’.

The reforms in the March 2014 budget changed the landscape of the annuity market. Our individual annuity sales fell from £1.3 billion in 2013 to £0.6 billion in 2014. Although we are receiving considerably lower revenue and earnings from individual annuities, the overall impact on our business is limited for two major reasons: Firstly, in 2014 individual annuities only represented 33% of annuity sales. We replaced reduced volumes of individual annuity sales with significantly higher bulk annuity transactions; Secondly, we’ve developed solutions that enable people at retirement, after receiving suitable guidance, to invest their pension pots using our longstanding expertise in both retirement income products and investment management. Our new post retirement plans enable consumers to access their retirement savings and take income in ways which offer a greater degree of flexibility.

A record year for bulk annuities

In 2014, our bulk annuity sales doubled in size to a record £5.9 billion. We believe that this will make us the largest provider of bulk annuities in 2014. As well as writing the UK’s largest ever buyout (£2.5 billion TRW pension scheme) and largest ever buy-in (£3.0 billion ICI pension fund), we wrote further significant transactions with Ofcom (£50 million), Unilever (£129 million) and Enterprise Inns (£35 million). These were significant as they included a number of innovative features demonstrating our ability to deliver better solutions to our customers. We also carried out more than 40 smaller transactions for a total of £186 million.

Old man holding a chicken (photo)

Helping wider society

The policies that we write also benefit wider UK society. Around 35% of all bulk annuity premiums we received in 2014 have been invested in direct investments. These investments have a wider social benefit as well as providing us with secure investment opportunities.

35%

Approximate percentage of bulk annuity premiums received in 2014, allocated to direct investments

The wide range of derisking choices we offer pension schemes:

  • We have a strong focus on equity index funds, with £275 billion of equity index assets under management
  • Our multi-asset growth and fixed income funds support clients’ growth strategies
  • Our market leading LDI proposition offers risk management strategies and hedging tools
  • Buyout plans secure annuity policies on behalf of scheme members, taking the pension scheme liability off the corporate balance sheet
  • Buy-in plans insure all payments due from the scheme to a subset of the scheme’s members. The pension liability remains on the company’s balance sheet
  • Longevity insurance covers the financial risk of pensioners surviving longer than previously anticipated.

Key information

DB pension liabilities
£1.7tn

Estimate of UK DB pension liabilities on a full buyout basis

Market insight
97%

Of FTSE 100 defined benefit schemes closed to new members

Members can be reassured that this will improve the security of their benefits by substantially reducing longevity risk for the fund.”

David Gee, Chairman of Trustees for the ICI Pension Fund

ICI: The UK’s biggest bulk buy-in transaction

This £3.0 billion buy-in reduced risk and enhanced security for a significant section of ICI’s pensioners. We were chosen for our covenant strength and ability to work with the fund’s trustee to ensure a smooth transition of assets.

MANAGING THE RISKS

When we write annuities we have to estimate people’s life expectancy. We call this longevity risk. Longevity and credit, the risk of default by the issuers of bonds used to back our annuity liabilities, continue to be the most significant risks in our retirement business and the largest on our group balance sheet. As well as our capabilities to evaluate and price for longevity, we actively use reinsurance to manage aggregate exposures. Our credit experts in LGIM manage the exposures to credit risk.

TRW £2.5bn buyout

The UK’s largest ever pension buyout

In November 2014 we announced a £2.5bn buyout with the TRW Pension Scheme covering 22,000 of the scheme’s pensioners, confirming our position as the leading insurer in tailored derisking solutions for larger schemes.

Not only was this the largest buyout transaction in the UK to date, but it also incorporated a number of innovative elements that were included as part of an integrated, broader risk management strategy for the scheme.

In particular, a pension increase exchange offer was made to over 15,000 pensioner members as part of the buyout process.

The project required close collaboration between the scheme’s trustees, the sponsoring employer and both our bulk annuity business and Legal & General Investment Management.