In 2014 we saw a rapid rise of larger pension schemes using de-risking solutions; this year has seen schemes using more innovative ways to de-risk their pension schemes. Here Phill Beach, Legal & General’s UK pension risk transfer director for core business, examines the landscape and highlights five key trends that will hit the market in 2016.

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What has the de-risking landscape been like in 2015?

There have been many changes in the market this year with Solvency II playing a key role, which has led to innovation in the marketplace. In particular, we have seen several schemes finding new and creative ways to slice their risks. The key aim has been to help insure the key risks when the scheme is not fully funded.


What innovations can we expect to see coming out in 2016?

We anticipate seeing five key areas of innovation in 2016. Some of these are already in existence but are likely to grow, whereas others are relatively new.

1) New ways of slicing risk

We’re already seeing a lot of pension schemes looking to chop up their risk in new and interesting ways and we are likely to see a lot more of this in 2016.

Historically we have seen schemes considering pensioner buy-ins only or even to top-slice the risk and just insure away the largest risks. This often takes many of the biggest risks off the table, but is significantly less expensive than a full buy-in or buyout.

Another approach we’re likely to see more of is schemes insuring away the tail of the liabilities. This is when a scheme insures all the liabilities after a certain point in time, for example five or ten years. This means that the premium can be significantly reduced and schemes can remove a substantial proportion of their risk - the longevity and longer-term asset risks - but it allows trustees to keep hold of some of the scheme’s assets for short term payroll purposes.

This is a particularly useful tool for those schemes that are not so well-funded and cannot afford an all or nothing solution, like a buyout. It is also a perfect fit when there is a sponsor commitment to make short term payments that could support the scheme’s payroll until the insurance coverage takes over.

2) Small scheme longevity risk transactions

Transactions to insure small scheme longevity risks have been thin on the ground in 2015 but we are expecting to see a lot more of them next year.

Part of the reason they have been less common is a lack of education and understanding of these kinds of arrangements among smaller schemes. However, as more and more of the larger schemes are heading down this route, it will promote awareness and we should see more small schemes taking this route.

In addition, as schemes’ understanding of their risks improves, trustees will better understand just how big the impact of that longevity risk could be.

3) Deferred premium

We have seen increased interest in deferred premium solutions over the last year – where a scheme can complete a buy-in, but instead of paying the whole premium on day one they have the ability to pay a certain percentage, and then pay the rest over a number of years. However, as this method involves credit risk for the insurers, it will be more challenging to implement when Solvency II comes into force in 2016. Despite this, there is still demand for strategies that enable schemes and their sponsoring companies to take risk off the table without paying for everything up front as they would in a traditional buy-in or buyout.

At Legal & General we have been working on a new product, the ‘Accelerated Buy-in’, which we expect to be available next year, which will enable schemes to pay for a buy-in in a more flexible way.

4) System development

Monitoring the market is fundamental to securing opportunities at the right time and value. Because of this providers will be looking to develop their systems to enhance functionality.

At Legal & General we are focusing on system development. For instance, next year we will be launching an updated system which allows us to turn around the quotes much more quickly.

Across the industry I expect we will be seeing much improved capability to monitor pricing on a more regular basis. The idea is to achieve daily re-pricing for schemes that are looking to monitor their position in the market and strike at the best time.

5) Behind the scenes

There is a lot of innovation going on in the background that schemes are less likely to be aware of, which come through in terms of improved pricing.

For example, the insurance market is making changes both in terms of asset sourcing and reinsurance management.

Some trustees may have concerns about whether Solvency II will affect pricing in 2016 but there are certainly a lot of strategies being developed to try to mitigate price increases, which should keep buyouts achievable.

How will schemes be impacted?

All the innovations can broadly be split into two camps: those which make de-risking more accessible to smaller or less well-funded schemes and those which are designed to make de-risking more cost-effective.

The net result will be the same: allowing more schemes to move much faster down the de-risking journey.

For those schemes that cannot afford a full buyout, the message is that there are a number of other liability management exercises available. These innovations make de-risking possible for these schemes which will allow trustees to significantly accelerate plans to take key risks of the table as early as possible.

Phill Beach is the UK pension risk transfer director for core business at Legal & General 

For more information on how Legal & General can help please contact Phill Beach on 07834 343493 or email