GOVERNANCE
FINANCIAL STATEMENTS
strategic report
89% o dfnd bnft pnin s hms a e coe t nw mme s ad ic esnl t ftr a c ul (%) 89% OF DEFINED BENEFIT PENSION SCHEMES ARE CLOSED TO NEW MEMBERS AND INCREASINGLY TO FUTURE ACCRUAL (%)
We are continuing to invest in our proposition and service to reduce the impact on scarce human resources and eliminate process friction.
100
80
60
40
Heightened government, regulatory and fiduciary focus alongside consumer activism has pushed environmental, social and governance (“ESG”) considerations up the agenda for UK defined benefit pension schemes. With new regulations for climate reporting introduced with the Pensions Schemes Act 2021, more trustees considering de-risking have sought assurance that ESG considerations underpin the asset choices in insurers’ investment portfolios. OUTLOOK The structural growth drivers for the defined benefit de-risking market have accelerated and the outlook for 2023 and beyond is exciting. The increase in gilt yields has reduced the estimated liabilities of defined benefit pension schemes and dramatically improved funding levels. Employee Benefit Consultants expect that this will translate into rising market volumes and that demand will remain strong over the long term, with c.£600bn expected to transact in the next decade, of which potentially more than £200bn could transact in the three year 2023-25 period (source: LCP). Schemes who ordinarily expected to be fully funded towards the middle of the decade have been able to bring forward their de-risking plans. Insurance capacity has kept pace with demand but the increased transaction volumes forecast are likely to increase pressure on scarce human resources. When selecting new business, insurers will triage the opportunities available to them. As a result, small and medium size schemes targeting Buy-out must have their governance, data and benefit specifications in good order to secure insurer engagement. Just Group is continuing to invest in its proposition and service to reduce the impact on scarce human resources and eliminate process friction. This will increase the capacity to conduct more business.
20
2018 2019 2020 2021 2022 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Closed to new members (open to benefit accrual)
Source: The Purple Book 2021, PPF Closed to future accrual 2022
D D -rsig tasci n (£b) DB DE-RISKING TRANSACTIONS (£BN)
60
50
40
30
20
10
2022 (forecast)
2017 2028 2019 2020 2021
2011 2012 2013 2014 2015 2016
Backbook acquisition
Forecast range
Buy-in/Buy-out
Source: Just analysis, Hymans
In June 2020 The Pension Regulator (“TPR”) issued guidance for trustees and sponsoring employers considering transacting with alternative defined benefit de-risking solutions. Regulation by TPR is outside of the insurance regime and so these new alternatives including DB consolidators would offer reduced protection for members compared to a fully protected and PRA regulated insurance solution. So far, only one DB consolidator, Clara-Pensions, has completed the TPR assessment process, however at the time of writing have yet to transact. We welcome innovative solutions to the market, but irrespective, we believe the scale of the market and strength of demand for ‘gold standard’ insurance solutions will mean that trustees and their consultants will continue to prioritise the insurer pathway where possible. WIDENING THE INVESTMENT OPPORTUNITY Insurers cashflow match liabilities through the origination of a mix of investment grade liquid and illiquid fixed income assets. To offer attractive new business pricing, insurers must have strong capabilities to originate high-yielding, medium and long duration illiquid assets. Illiquid assets are split between the lifetime mortgages that we originate and manage ourselves and other illiquid assets, which includes a diverse range of investments such as infrastructure debt, private placements, commercial real estate mortgages, ground rents and income strips. The government’s consultation response to the proposed reforms of the Solvency II regime, published in November 2022, when implemented will widen asset eligibility criteria. This could unlock billions of pounds of investment from insurers into the UK. Insurer long term capital is particularly suitable for investments to decarbonise the economy, develop affordable and social housing, to make improvements to infrastructure and to support the UK’s world class science and research capabilities.
11
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