Just Group plc | Annual Report and Accounts 2024
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Market Context
HELPING CUSTOMERS STRENGTHEN THEIR FINANCIAL RESILIENCE
DEFINED BENEFIT DE-RISKING SOLUTIONS Private and public sector employers traditionally provided Defined Benefit (“DB") pension schemes, often called final salary schemes, as an important benefit for employees. The employer would share some responsibility for the wellbeing of their former workers when they retired by providing a guaranteed retirement income based on their earnings history and length of employment. However, providing these guaranteed benefits became expensive. Over 95% of the UK’s DB pension schemes are now closed to new members. Continuing to operate these schemes has become more onerous for employers. The DB de- risking business has allowed these employers to alleviate the financial and operational challenges of running these schemes by passing responsibility for the schemes to insurers who can fully or partially de-risk the employer’s defined benefit obligations. DB de-risking can occur via a Buy-in or Buy-out. All Buy-outs begin as Buy-ins. A Buy-in involves the pension scheme paying a premium to an insurance company to purchase an income stream that matches its DB obligations to some or all of its members. The risk attached to that portion of the scheme is transferred to the insurer, but the scheme retains legal responsibility for its DB obligations to its members. During a Buy-in, the pension scheme continues to pay pensions to members, but the funding wholly or partly comes from the insurer. Buy-out is when the scheme’s obligations move fully across to the insurance company to pay its members’ benefits. As part of a conversion from Buy-in to Buy-out, members receive individual policies and become customers of the insurer. Subsequently, the pension scheme is closed (also known as completing wind-up) as the DB obligations are moved across to the insurer, who now pays the members directly. CURRENT MARKET As of 31 March 2024, total UK DB obligations were £1.2tn. Within this, 78% of the almost 5,000 schemes have assets of less than £100m. Since 2019, the funding levels of all schemes on a full Buy-out basis has increased from 72% to 94%. The improvement in funding levels was initially driven by sponsoring company contributions and insurer’s ability to access improved reinsurance terms. In the last few years, the main driver has been higher long-term interest rates, which reduce the liability value of the DB pension obligation by more than the asset value held in the scheme. Favourable market conditions have led to more DB schemes now being in surplus. According to the Purple Book, March 2024, there is an aggregate £68bn of surplus on an insurer Buy-out basis for those schemes that are already in surplus. Surplus has been a hot topic amongst trustees and their advisers throughout the year, in terms of debating the best end game option for their scheme (e.g. run-on versus insurance). Buy-in (and ultimately Buy-out) remain by far the most popular de-risking options for the majority of schemes (source: LCP). COMPETITIVE, REGULATORY FACTORS With a new government elected there is a period of re-assessment towards pension policy. Chancellor Rachel Reeves’ first Mansion House speech announced the findings from the first part of the government’s landmark pension review. This focused on consolidation of smaller occupational defined contribution (“DC") pension schemes, Local Government Pension Schemes (“LGPS") and a drive to invest more into UK productive investment to enhance UK economic growth. The insurance industry has pledged to invest £100bn in productive finance over the next decade.
Structural drivers in our markets mean we can grow profits sustainably while delivering better outcomes for customers.
There is a vibrant insurance de-risking market for defined benefit pension schemes of all sizes and Just are delivering outstanding service to small and large schemes and everything in between.”
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