As the pensions industry continues to digest the recent judgment in the Lloyds Banking Group GMP equalisation case, one area under the spotlight is the impact on the market for pension scheme buy-ins and buy-outs. This is both for schemes that have previously implemented bulk annuity policies and for those looking to do so in the future, as well as insurers.
Schemes with existing bulk annuity policies
Mike Edwards, partner in Aon's Risk Settlement Group, said: "Over £50bn of buy-ins exist in the market with only a minority expected to relate to schemes that have already equalised GMPs. Helpfully, the bulk annuity market has done a good job of anticipating an eventuality such as the Lloyds ruling with ‘future proofing’ contractual provisions typically included. These enable schemes to restructure insured benefits to reflect things like GMP equalisation.
“However, the recent High Court judgment may lead to a range of methods being adopted by schemes, with some significantly more complicated than others. This has the potential to present a huge problem to insurers as - with an expected surge in requests from schemes to update existing insurance terms - detailed consideration will need to be given to each individual case from an administration, regulatory compliance and pricing perspective.”
Mike Edwards continued: “There is a risk that the newly established need to address GMP equalisation puts a further strain on insurer bandwidth, particularly in the current environment where demand for buy-ins and buy-outs is at an all-time high. However, the market has shown itself to be resilient to legislative shocks time and time again and it’s clear from our discussions so far with insurers, that the market is very keen to develop solutions that meet the needs of all parties, including the members that ultimately receive a pension.”
Schemes considering buy-ins and buy-outs in future
Alongside obvious considerations such as cost and administration, schemes also need to consider their long-term objectives when choosing between different methods for GMP equalisation. There is a variety of potentially viable methods and with that the risk that pension schemes may choose a method which is incompatible with what can be insured in the future.
John Baines, partner in Aon’s Risk Settlement Group, said: "Insurance is designed to be a scalable business, as that facilitates the pooling of risks. It also means that any equalisation method that introduces overly burdensome administration is likely to be unwelcome to most buy-in and buy-out providers. As such, schemes should be alert to the fact that it’s likely that there will be an obvious preference for standardisation and simplification from insurers on this issue.
“But this doesn’t mean that schemes should hold off from pursuing a buy-in or buyout while addressing equalisation. For schemes looking to reduce risk using buy-ins and buy-outs – and at a time when pricing is attractive – being flexible has become important, for instance on transaction timing, in order to capture the best pricing. GMP equalisation is another area where flexibility from schemes is likely to increase insurer engagement. As such, it will be even more important to ensure they are working with an experienced adviser who has a clear understanding of the solutions available and who can help them navigate through the current busy market."
As a leading adviser on bulk annuities, Aon has been lead adviser on over £5.5bn of buy-in and buy-out transactions for pension schemes so far in 2018.
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