JUST GROUP PLC Annual Report and Accounts 2019
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market context
Structural drivers in our markets mean we can grow profits while delivering better outcomes for customers
UK markets
DEFINED BENEFIT DE-RISKING SOLUTIONS Introduction
Defined benefit pension schemes have an obligation to pay a pre- determined monthly retirement income based on an employee’s earnings history, tenure of employment and age. Operating these schemes has become unattractive and more costly for employers over the last decade and this has created an opportunity for guaranteed income providers to de-risk, fully or partially, an employer’s existing defined benefit obligations to its members. Taking the risk out of paying company pensions Defined benefit de-risking can occur via a Buy-in, whereby a pension scheme pays a single premium to an insurance company to purchase an income stream that matches its obligations to its members, but retains legal responsibility for those obligations. An alternative is a Buy-out, where a pension scheme removes its obligations by purchasing individual insurance policies to replicate its obligations to some or all of its pension scheme members, who then become customers of the de-risking provider. Current market and outlook There are an estimated £1.8tn of UK defined benefit pension scheme liabilities (source: PPF), which is driving high demand for de-risking solutions with total transactions forecast to total £700bn between 2017 and 2032 (source: Hymans Robertson). The defined benefit de-risking market has achieved strong growth year on year since 2017 and annual flows are now expected to exceed £40bn over the next decade (source: Aon, Hymans Robertson). Even this level of activity will only result in 2% of total defined benefit assets being de-risked each year. 2019 has been a record year for the defined benefit de-risking market, where transactions are expected to exceed £40bn (source: Aon), ahead of the previous record in 2018 of £24.2bn (source: LCP). There were 11 transactions written over £1bn and the largest transaction to date, written in 2019, was £4.7bn. While insurer capacity to write a higher volume of individual transactions will increase in the long term, over the medium term we believe the demand for the number of de-risking transactions exceeds the current supply available from providers. The defined benefit de-risking market is usually characterised as starting slowly in the early part of the year and building pace, with a peak of activity often seen in the final quarter. For a market with traditional peaks and troughs, 2019 was different, with high levels of activity and demand throughout the year. Employee benefits consultants are predicting another busy year in 2020 based on the pipelines of new business expected from their clients. The Department for Work and Pensions collected views on a new legislative framework for authorising and regulating defined benefit superfund (or consolidation) vehicles of the type envisaged by the White Paper – Protecting defined benefit pension schemes – published in March 2018. These consolidation vehicles, which are effectively still subject to government legislation, are seeking to provide a new de-risking solution for schemes and sponsors that cannot achieve a Buy-out from an insurance company. These so-called consolidators are proposed to be regulated outside of the insurance regime and so are not subject to the more robust capital requirements of the Solvency II Directive. If these new arrangements are regulated as proposed they would provide a cheaper solution to a Buy-out of liabilities for some pension schemes, although at the cost of reduced protection for members compared to an insurance solution.
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