10 | Just Group PLC | Annual Report and Accounts 2023
MARKET CONTEXT HELPING CUSTOMERS STRENGTHEN THEIR FINANCIAL RESILIENCE
Structural drivers in our markets mean that we can grow profits sustainably while delivering better outcomes for customers. DEFINED BENEFIT DE-RISKING SOLUTIONS Defined benefit pension schemes, often called final salary schemes, were traditionally used in both the private and public sectors as an important benefit for employees. The employer shared 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 90% of the UK’s Defined benefit pension schemes are now closed to new members and/or accrual of future benefits. 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 through passing responsibility for the schemes to insurers who can fully or partially de-risk the employer’s defined benefit obligations. Defined benefit de-risking can occur via a Buy-in or Buy-out. Before moving to Buy-out, many schemes move through the Buy-in phase. This involves the pension scheme paying 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 retaining legal responsibility for those obligations. The risk attached to that portion of the scheme is transferred to the insurer, with schemes often de-risking over a period of time through multiple Buy-in tranches. Buy-out allows a pension scheme to fully remove its obligations to pay the benefits of its members, who then receive individual policies and become customers of the insurer. Subsequently, the pension scheme is wound down as the pension obligation owed to each member has moved across to the insurer. CURRENT MARKET As of 31 March 2023, total UK defined benefit obligations, across more than 5,000 schemes, owed by sponsors were £1.3trillion. Over the past 5 years, the funding level of the schemes on a full Buy-out basis has steadily increased from 68% to 112%, initially through sponsor contributions and improved pricing for longevity reinsurance, but especially over the past two years through rising interest rates. This has resulted in Buy-out being a realistic option for an increasing number of schemes, who have strong appetite to take the opportunity to de-risk. We were consistently busy during 2023, driven by our bulk quotation service and EBCs actively managing the industry pipeline, leading to less seasonality than previous years.
However, de-risking is not an overnight process. We estimate that since 2007, only 15% of defined benefit liabilities have been transferred to insurers via de-risking transactions. There is significant headroom for growth over the next decade. In 2023 bulk annuity volumes are estimated at c.£50bn (source: LCP De-Risking report 2023), with a continued shift towards full scheme transactions. COMPETITIVE, REGULATORY FACTORS AND POTENTIAL FOR ALTERNATIVE DE-RISKING SOLUTIONS The Pensions Regulator’s interim regulatory regime has been in place for three years. One consolidator, Clara, has successfully completed the Pensions Regulator’s assessment. They completed their first deal at the end of 2023. In July 2023 the Chancellor delivered his Mansion House speech outlining a number of initiatives to enhance pension savings in the UK, whilst also seeking to increase funding for high-growth companies. Two aspects are particularly relevant for the defined benefit market: 1. DB commercial consolidation The potential for the establishment of a regulatory regime to consolidate smaller defined benefit schemes into larger funds was mentioned. This initiative would be overseen by The Pensions Regulator. The government’s objective is that larger funds would invest a higher proportion of their funds in productive assets, compared to many closed or smaller defined benefit schemes.
The structural growth drivers for the defined benefit de-risking market have accelerated and the outlook for 2024 and beyond is exciting.”
Powered by FlippingBook