Defined benefit derisking continues to create pressure on service providers to adapt and keep hold of clients and assets, and insurers with asset management arms have identified an advantage. What should trustees know if they consider choosing their asset manager’s parent company for a buy-in or buyout? 

 

As defined benefit schemes move from the asset management to the insured space, one insurance company is highlighting that wins were existing clients of its own asset management arm. Legal & General has named the Cornish Mutual, BAA, Triplex Lloyd, Mitchells & Butlers and Edwards Wildman Palmer pension schemes as former LGIM clients. Overall, about two-thirds of L&G’s buy-in, buyout and assured payment policy transactions over the three years to the end of 2020 were with existing LGIM clients.  

 

With assets under management of about $1.3tn, LGIM is one of the large investment managers, and one of a handful offering passive investments, so it is perhaps unsurprising that many schemes buying bulk annuities are among their clients. But the firm has made clear that it aims to make the most of its end to end retirement proposition by offering paths from one business part to the other. In 2021, CEO Nigel Wilson noted that there was a $53tn business opportunity in derisking schemes, showing that LGIM helps to build client relationships that can be leveraged by L&G Retirement Institutional. 

 

 

One attraction for schemes that choose the parent of their asset manager for a transaction is pricing. Dom Moret, head of origination and execution at L&G Retirement Institutional, explained that for the majority of LGIM clients, his unit is able to lock its pricing to the value of their assets. “This gives these clients certainty that the economics of the transaction won’t change once they’ve made a decision to proceed with a transaction,” he said. 

  

In a number of cases, the firm has also been able to receive assets in-specie as premium payment, he said, which can be more efficient for the insurer while again offering pricing benefits to the client. An in-specie transfer also saves schemes from having to liquidate these assets before paying the premium. 

 

 

However, apart from pricing and operational advantages, Moret admits that “there are softer factors that may also feed into the decision for some schemes, such as familiarity with and trust in the Legal & General brand”. 

 

Having picked up on this ‘soft spot’ for existing providers, the firm is making ample use of it. Moret said his team is now “increasingly working with LGIM clients earlier in their journey”, for example helping them to prepare their data for a transaction and explaining the drivers of buy-in and buyout pricing.  

 

In some cases, the insurer works with LGIM clients’ advisers “to establish a dynamic derisking strategy that links the scheme’s investment and hedging strategy to future buy-in/out transactions”, he noted, whereby schemes can set triggers to lock in insurer pricing when markets move in their favour, either by making changes to their investments or by executing a buy-in under an umbrella contract. 

 

  

The majority of these transactions have followed a competitive tender, said Moret, adding that “sole insurer processes are still in the minority, despite the benefits they can bring" - such as the insurer being more likely to quote at all, as L&G only quotes on around two-thirds of the requests it receives.  

 

“We 'triage' the requests we receive each week and one of the factors we consider is the likelihood of a transaction with Legal & General,” said Moret, adding that exclusivity means the scheme is “first in the queue” for insurer resources. 

 

L&G is unlikely to quote for every scheme with LGIM assets, believes Tiziana Perrella, a professional trustee at Dalriada Trustees who was involved in the Cornish Mutual transaction with L&G, but she said being an existing client will be a factor in the triage process. “L&G got a lot more joined up with LGIM,” she added. 

 

The firm is looking to keep hold of DB assets, she suggested, saying this was borne out by the development and investment in the full fiduciary proposition, with LGIM offering ‘normal’ funds, buyout-aware funds and now fiduciary. As the main provider of pooled funds to small schemes, creating a path for them into bulk annuities has been important for L&G. 

 

The Cornish Mutual scheme chose to do the deal in an exclusive process. “We didn't have a tender in that case because it was a small scheme,” said Perrella, where insurer engagement was more important than ‘squeezing out’ more in terms of price.  

 

“If you can afford it, it’s automatically a good deal. You just have your metrics and your adviser needs to help you establish if that is the metric. You won’t know it’s the cheapest, but... there could always be a better one tomorrow,” Perrella argued. The only downside to an exclusive process in her view is that trustees need to persuade the sponsor that the process is going to produce something that is market competitive. 

 

If a scheme looking to buy out has its assets with LGIM, the firm “may feel they can price that a bit keener”, said Adam Davis, managing director at buyout specialists K3 Advisory. If a small scheme is looking to insure its liabilities and most or all assets are with LGIM, the alternative to attractive pricing would be to lose the assets for the group, he noted. “It’s probably at the edges, but there are probably some economic drivers,” he said. 

 

Being able to guarantee prices because assets are with its own asset manager will also give the insurer a competitive advantage, he said.  

 

L&G is so far the only insurer working closely with its asset management arm to secure business, he believes; the only other pension insurer with an asset manager does not appear to be as connected with it. 

 

 

Davis does not see any regulatory issue with schemes selecting the parent of the asset manager for a risk transfer, even in an exclusive process, as the scheme should be taking advice and receive sign-off from the sponsor anyway.  

 

“Generally, I like to create competitive tension. But ultimately if an insurer is willing to offer a price that a sponsor thinks is good value, and if it moves quickly it is not going to lose it, I'm very open to do that,” he said. Delaying to conduct multiple selection rounds “might get a better price, but what else has happened to your assets in the meantime?” he noted. 

 

While the industry has no problem with schemes changing from asset management to insurance with an existing provider – what about regulators? 

 

A TPR spokesperson said it is not uncommon for trustees to build long-term relationships with particular providers. "There can be efficiencies and savings in extending those relationships to meet the changing needs of the scheme - this includes schemes moving to insure all or part of their liabilities,” the spokesperson said. 

 

“However, it is important that trustees understand the nature of any agreements they enter into with providers and the terms of when and how they can exit those. Trustees must be able to shop around and choose the most appropriate provider for their scheme at key decision points, and should take appropriate advice to ensure the best possible outcome for their members,” the spokesperson noted, but said that “there is no reason in principle why their current provider may not be considered”. 

 

What is your view on asset management clients becoming insurance clients?

Tiziana Perrella

Adam Davis

Sammy Cooper-Smith