UK life insurers brace for hit from pension superfunds

UK life insurers are facing an onslaught from cut-price rivals threatening to slash prices 50 per cent in one of their biggest and fastest-growing markets.

The development of so-called pension superfunds has sent shockwaves through the industry. One insurance executive called new rules covering the superfunds “terrifying”, while the Association of British Insurers said they amounted to a game of “retirement roulette” for pension scheme members.

The superfunds are designed to give companies more choice over what they do with their old defined benefit pension schemes, where members are guaranteed a certain level of payments.

At present, they can either keep hold of them or pass them over to an insurance company via a deal called a buyout. But this is expensive, partly because of the strict capital rules governing insurers, and is unaffordable for many employers.

Superfunds, sometimes called consolidators, will offer a cheaper alternative for companies that have little or no chance of getting their schemes to a buyout. They will be backed by third-party capital but will not have to comply with the same Solvency II capital rules that insurers face.

The superfunds could be a lot cheaper than the buyouts offered by insurers. According to UBS research: “Consolidators can typically price up to 50 per cent less than insurers, depending on a scheme’s membership composition.”

That could prove painful for those insurers that operate in the bulk annuity market — which covers buyouts and similar products — including Legal & General, Aviva, Phoenix, Just, Pension Insurance Corporation and Rothesay Life.

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The market was worth about £25bn last year, according to Willis Towers Watson, and is forecast to grow by a fifth this year.

“Bulk annuities is an important market for UK life insurers,” said UBS analyst Colm Kelly. “It is one of the few growth areas across the UK life insurance sector, and it is expected to grow significantly in the future. It’s a very important source of new business.”

Faced with this threat to a core business, the insurance industry has reacted strongly to a recent government consultation on the rules covering the superfunds.

Yvonne Braun, director of policy at the ABI, said the study was proposing “a parallel universe where financial institutions do something similar to insurers but in an environment with very lax regulation”.

Backers of the superfund idea say insurers’ fears are overdone. “I don’t see our proposition as competition for insurers,” said Luke Webster, chief executive of The Pension SuperFund. “My expectation is a net growth in buyout transactions.”

Mr Webster says companies with strong pension schemes will still look to the buyout market, while those with weaker schemes will have a new option. That, he says, gives him a market worth £200bn-£250bn in pension liabilities to aim for. He expects that to double in the next five years and says some of those liabilities could eventually end up in the buyout market, potentially providing a boost to insurers.

But insurers are wary. Ms Braun expects the consolidators to go after the same schemes insurers are targeting. She also argues that the new rules create conflicts of interest. For example, employers could deliberately try to keep their pension schemes weak, increasing the chances of them going to the much cheaper superfund market.

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The price difference could be hard for the insurers to overcome. In a survey of 100 pension schemes conducted by UBS, 43 per cent said price was the biggest barrier to completing a bulk annuity deal with an insurer.

Charlie Finch, a partner at advisory firm Lane Clark & Peacock, says the schemes he advises are interested in the idea of superfunds. “There is a plausible scenario where these consolidators gain critical mass and become an accepted standard approach for pension schemes.”

“Some schemes are saying it is not for them,” he added, while others welcomed “new ideas”.

If superfunds take off and start to suck business out of the buyout market, the insurers might want to set up their own superfund vehicles. A number are already looking at the options.

But it may not be easy for them to replicate the structure, partly because of the different regulators involved. The insurers are overseen by the Prudential Regulation Authority and the Financial Conduct Authority, which insist on strict application of Solvency II rules. Superfunds will be regulated by The Pensions Regulator. It is unclear if insurers will be allowed to operate under both regimes at the same time.

The government consultation suggests it is resistant to insurers setting up their own superfunds. “There may be a need to guard against incentives for insurance companies to establish a vehicle outside the current regulatory structures to acquire, or conduct, business that would otherwise have been acquired by the insurance company itself,” it said.

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Ms Braun said that “the way the consultation is pointing at the moment, insurers would be kept out of the market, which is ironic as they have expertise in this area”.

Mr Webster at the Pension SuperFund is relaxed about the prospect of competition from insurers.

“They clearly have the skills,” he said. “If they were to find a way to do it, that’s not a huge concern for me.”



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