Pension de-risking is bigger business than ever, going by a flurry of updates from insurance firms big and small this week.
At the upper echelons of the FTSE set, de-risking deals effectively saved British insurance big cap Legal & General Group PLC (LSE:LGEN)’s skin.
L&G’s pension-based operating profits rose by 10% in 2023 to generate £886 million in a year that saw record appetite for de-risking among legacy pension providers.
What is de-risking?
Pension de-risking deals, or PRTs, are financial arrangements where a pension scheme transfers some or all of its liabilities and risks to an insurer.
These deals aim to reduce or eliminate the financial and operational risk associated with pension plans for the original plan sponsors, ensuring that the pension benefits are secured for the beneficiaries, typically through annuities provided by insurance companies.
With many of Britain’s legacy defined benefit (DB) schemes maturing, employers who sponsor these schemes are willing to pay to offload this risk to a third party.
Insurers are more than willing to oblige.
Some £50 billion in pension risk transfers (PRTs) was transacted in the UK, with L&G leading on some landmark deals, including the British Steel Pension Scheme and Boots Pension Scheme transfers.
L&G’s results already underwhelmed analysts with lacklustre year-on-year operating profits, but without this PRT windfall, the results would have been impressed even less.
L&G aims to write approximately £8-10 billion in PRTs per annum in the UK alone, and that doesn’t take into account international PRT opportunities.
“With up to £355 billion of UK PRT demand over the next five years anticipated and an increase in £1bn+ size individual transactions coming to market, we are expecting a period of heightened market volumes,” said L&G.
Midcaps join the party
PRTs featured prominently in FTSE 250-listed annuities provider Just Group Friday results, with the DB de-risking business for the year ended 31 December 2023 reaching £3.4 billion, up 21% from the previous year.
This growth was achieved through 80 transactions, compared to 56 in 2022.
Just attributed some of this success to its bulk quotation service, which gained popularity among employee benefit consultants, and its focus on both smaller schemes and larger transactions.
“Just is experiencing strong market demand for defined benefit de-risking solutions from pension schemes,” said the company.
Unlisted UK life insurer Royal London has leapt into the increasingly lucrative PRT market through a bulk annuity deal with the Royal Liver pension scheme.
Announced in a trading update this Friday, Royal London, which operates as a mutual, said the deal covered all the benefits of the scheme for all deferred pensioners and current pensions, removing the investment and longevity risk for the members of the scheme.
“We also entered into a separate policy in January 2024 with the Trustees of the Royal London Group pension scheme which partially covers the benefits of the scheme,” the ground announced.
Royal London said it expects to expand further into the PRT market. With de-risking deals heating up, it is unlikely to be the last one.