Just group PLC | Annual Report and accounts 2022
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.
As of 31 March 2022, total UK Defined benefit obligations owed by sponsors were £2.1tn, or roughly the same size as the entire UK economy. There are more than 5,100 defined benefit pension schemes in the UK. To date, we estimate that only 11% of DB liabilities have been transferred to insurers via de-risking transactions. Over the period, March 2017-22, the funding level of the schemes on a full buy out basis has steadily increased from 63% to 79%, driven mainly by sponsor contributions. CURRENT MARKET 2022 was a year of significant financial change for defined benefit pension schemes which had a major impact on the dynamics of the bulk annuity market. We estimate that since March 2022, rising gilt yield further improved the funding level of schemes to c.90% on average, with half of all schemes fully funded or better. Whilst many larger schemes will have significant interest rate hedging in place, all schemes benefit to a varying extent from rising interest rates. As interest rates rise the value of the defined benefit liabilities fall more than the value of the assets held against them, which closes the funding gap. Combined with improved pricing for longevity reinsurance and widening credit spreads, Buy-out came into reach for an increasing number of schemes. As a result, demand for de-risking increased, particularly in the second half of 2022, with this strong momentum continuing into 2023. In 2022 bulk annuity volumes are estimated to around £30bn for the year (source: Just estimates), but with a continued shift towards full scheme transactions. COMPETITIVE FACTORS AND POTENTIAL ALTERNATIVE DE-RISKING SOLUTIONS At present, there are eight providers of Buy-in and/or Buy-out transactions in the UK defined benefit market. These providers focus on some or all segments of the market according to their preferred transaction size, risk appetite, asset origination or reinsurance arrangements. Following the introduction of the Solvency II capital regime in 2016, longevity reinsurance is widely used to reduce the capital requirements of writing bulk and other annuities.
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. Almost 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. In a Buy-in, the 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. 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. An alternative is a Buy-out, where a pension scheme removes its obligations by purchasing individual insurance policies to pay the benefits of its members, who then become policyholders of the de-risking provider. Subsequently, the pension scheme is wound down as the pension obligation owed to each member has moved to the insurer.
The structural growth drivers for the defined benefit de-risking market have accelerated and the outlook for 2023 and beyond is exciting.
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