PI Partnership – LGIM


A BUYOUT JOURNEY BUILT FOR SMALLER SCHEMES


Achieving a buyout for smaller pension schemes has traditionally been challeng- ing. Not anymore. portfolio institutional spoke to a panel of people who play dif- ferent roles in the de-risking market to find out how things are changing for the little guy.


PI: It was a year like no other, but what were your experiences of 2020? Roger Buttery: In all the years that I have been a pension scheme trustee, this has been the most challenging. But despite difficulties in some areas, member bene- fits in the five pension schemes I am involved in have been paid.


A big thank you to the admin teams who moved seamlessly to home working. In terms of covenant issues, it is varied. I have one scheme where the employer has been helped considerably by the virus in terms of turnover. At the other extreme, I have an employer in the leisure industry where their income seized-up overnight. The trustees have received updates on the employers financial situation at regular intervals.


On another scheme, we were about to make some changes to DC funds just as the first lockdown started, so we held off until July when the world was calmer and there was less market volatility. Finally, there have been more trustee meetings, but shorter and more focused. Tim Dougall: Coronavirus was the big story of the year, be that the implications for trustee boards the impact on markets themselves or on us managing the assets. In March, growth assets lost value and gilt yields were volatile. So, for a lot of smaller pension schemes who did not have liabil- ity management in place or were not diversified away from equities, it was a tough year. Even though some markets have recov- ered, the yield movements mean that those who have not hedged have seen


funding levels fall. Against that backdrop, I am pleased that the service we have given our clients, where we delivered risk management and diversified their portfolios, has paid off. Julian Hobday: It was a busy year. The market carried on as before, despite the impact of Covid. We believe that buy-in and buyout premium volumes were between £25bn and £30bn in 2020. It is not the record £40bn plus we saw in 2019, which was driven by a small num- ber of mega transactions, but 2020 is shaping up to be the second-best year ever in the buy-in/buyout market, a fantastic achievement given the wider economic situation. Even though volumes were down from 2019, the number of schemes looking to


THE PANEL


Tim Dougall, head of fiduciary man- agement at Legal & General Investment Management (LGIM)


Julian Hobday, pricing and execution director, Legal & General Retirement Institutional


Roger Buttery, a trustee of five pension schemes


de-risk through insurance was consistent. It means that we have seen a lower aver- age premium size which has given an opportunity to lots of smaller schemes to engage with insurers, which has been a challenge historically.


In terms of pricing, we saw some processes stall in 2020 because the spon- sor did not have the bandwidth to consider de-risking its pension scheme given the wider economic situation caused by Covid. The market shock in March actually pro- vided some attractive pricing. Seeing some processes stall was offset by schemes that were well prepared, well hedged and were able to move quickly to take advantage of the opportunity. Overall, activity remains strong. Buyout remains the endgame for many pension schemes and Covid has not changed that.


16 | portfolio institutional December–January 2021 | issue 99


What we are proud of at Legal & General is that we are responsible for paying pen- sions to more than a million people, which has carried on without missing a beat, even through the depths of Covid in March and April.


PI: What are the main challenges for small schemes reaching for buyout? Buttery: This is where LGIM fiduciary management comes into its own for smaller schemes. For my £15m and £17m schemes, the traditional consultancy approach is difficult because it is expen- sive and takes a lot more of the govern- ance and time of the trustee board to put in place diversification, hedging, journey planning and de-risking. I am a great believer


in fiduciary management for


smaller schemes, and, for that matter, some of the medium-sized schemes, too. I also found that some insurers were not interested in my £15m and £17m schemes because they are so small. Then you also have challenges if there are both deferred and pensioners, as some insurers are only interested in the pensioners. I also have a scheme with less than 10 members which again lots of insurers are not interested in. But fiduciary management with LGIM means you have the certainty of getting that engagement and buyout quotes from Legal & General. The £17m Scheme went to LGIM fiduci- ary management then seamlessly into buyout.


It worked fantastically well for that scheme. We are hoping to get the other scheme to the same place in a couple of years.


PI: What are insurers looking for from schemes that want to buyout? Hobday: Member data needs to be in good shape, so it needs to be accurate, up to date and complete. We need a detailed description of the benefits to be paid that are being insured. That are reviewed by the scheme’s lawyers, so there should be no outstanding areas of uncertainty as to the benefits payable.


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