JUST GROUP PLC Annual Report and Accounts 2021
MARKET CONTEXT
HELPING CUSTOMERS STRENGTHEN THEIR FINANCIAL RESILIENCE
Structural drivers in our markets mean we can grow profits sustainably while delivering better outcomes for customers.
DEFINED BENEFIT DE-RISKING SOLUTIONS Defined benefit pension schemes have an obligation to pay members a retirement income based on their earnings history and length of employment. Operating these schemes has become more costly for employers and the benefits of providing them have fallen, creating an opportunity for guaranteed income providers to fully or partially de-risk an employer’s defined benefit obligations. Defined benefit de-risking can occur via a Buy-in, whereby a pension scheme pays a premium to an insurance company to purchase an income stream that matches its defined benefit obligations to some or all of its members, but retains legal responsibility for those obligations. An alternative is to Buy-out, where a pension scheme removes its obligations by purchasing individual insurance policies to pay the benefits of some or all of its members, who then become policyholders of the de-risking provider. CURRENT MARKET The first half of 2021 was slow in comparison to recent years and this resulted in strong competition between insurers for the small and mid-market transactions. In contrast, new project invitations picked up in the second half which was busy with transactions forecast to exceed £23bn (source: WTW). This volume is greater than the same period in 2019, pre COVID-19, but was achieved without the contribution of the volume of megadeals that characterised that record breaking year. So in aggregate, 2021 achieved premiums of around £30bn for the full year, a similar total to that achieved in 2020 which was the second busiest on record (source: WTW).
OUTLOOK The structural drivers of growth for the de-risking market are unchanged and the outlook for 2022 and beyond is strong. There are an estimated £2.3tn of defined benefit liabilities (source: PPF). The Pension Regulator’s (“TPR”) defined benefit funding code, which is expected to come into force by 2023, is likely to increase demand for pension scheme de-risking, as it seeks to improve funding and reduce reliance on sponsor contributions. Employee benefit consultants have projected that the market will grow to between £30-50bn per annum until 2025 with the potential for larger volumes thereafter (sources: Aon and LCP). We expect much of this projected growth will be delivered by mega-transactions underpinned by continued demand for small and mid-market transactions. While insurer capacity to write a higher volume of individual transactions is likely to increase in the longer term, over the medium termwe believe the demand for de-risking transactions will exceed the supply available. For the first time, Buy-out has become the preferred long-term ambition for schemes, overtaking self-sufficiency. With improving levels of funding, demand for Buy-outs is anticipated to continue building (source: Aon). As a result, we believe small and medium schemes targeting Buy-out will need to have their data and benefit specifications in good order to secure insurer engagement. In June 2020 TPR issued guidance for trustees and sponsoring employers considering transacting with a defined benefit superfund model and other similar models. These so-called superfunds are a pension consolidation solution for schemes and sponsors to transfer risk where they cannot achieve a Buy-out from an insurance company. TPR has also issued guidance for those considering setting up and running a superfund and an assessment process that TPR will use to establish whether an application to establish a superfund has met the required standards. Following assessment and inclusion on the TPR approved list, superfunds will be subject to a further assessment when TPR is notified of an intended transfer into it.
Taking the risk out of paying company pensions
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