LGIM – PI Partnership
LGIM fiduciary management clients are guaranteed to get buyout pricing. Julian Hobday, LGIM
Affordability is also key. Schemes should have an idea of pricing and how any buy- out is to be funded.
Another one is to make sure that the key stakeholders are on board with the pro- cess. Ultimately, if it is a buy-in or a buy- out it is a trustee decision, but the spon- sor needs to be onside, especially if additional funding is required to make the deal happen. Finally, where the assets are. Have they been de-risked? Are the assets hedged to protect
against movements in buyout pricing? Are they sufficiently liquid to be sold or transferred quickly if the buyout pricing is there? Working with pension schemes at all stages of their lifecycle is fundamental to what Legal & General does, from the early days when they are invested in growth as- sets through to buyout. And given Legal & General’s existing relationships with lots of pension schemes, we are keen to sup- port them as and when they look to buyout.
PI: How is LGIM helping smaller schemes to get ready for buyout? Dougall: We launched NavGuide in 2020, which aims to deliver a better, cheaper and faster service for smaller schemes to navigate their journey to buyout.
It will help schemes set a journey plan and manage their portfolio and risk along that journey plan. We then build a buyout ready portfolio to help protect against the risk of a fall in their buyout funding level. The provision of buyout pricing is fully integrated into the NavGuide service. If the client decides to buy-in/out with Legal & General we can also facilitate a smooth transition at zero transaction cost. Hobday: We have been supporting LGIM fiduciary management clients by provid- ing pricing earlier in the process, which is typically a year or two before they ap- proach the market. This lets Tim and the team set the invest- ment strategy. Actuarial estimates are dif- ficult to predict for smaller schemes, so it gives them an actual buyout premium to target their investment strategy towards. It also helps with budgeting if a contribu- tion is needed from the employer. So, you not only have the transactable buyout price on day one, but we can update and monitor it. If markets move in a scheme’s favour, as we saw earlier this year, we can move quickly to lock in any attractive pric- ing that happens.
The joined-up approach between the fidu- ciary management team and ourselves as a potential buyout provider, means we can structure the assets to be insurer friendly. They can then be transferred quickly, effi- ciently and cost effectively when the scheme looks to complete the buyout. LGIM fiduciary management clients are guaranteed to get buyout pricing. This has been challenging for smaller schemes in the past, so it gives them comfort that they will get a price and complete the buy- out when the time is right for them.
PI: You mentioned insurer-friendly assets, what does a buyout-ready portfolio look like?
Dougall: First, we protect against interest rate and inflation risk by matching the cash-flows on a buyout basis. Secondly, we typically like to invest in insurer- friendly corporate bonds that generate a
Issue 99 | December–January 2021 | portfolio institutional | 17
return whilst matching buyout prices, so they
are easily transferred when the scheme wants to buyout. Thirdly, we think about cash-flow and liquidity. The schemes who are going to buyout are more mature and in the run- up to buyout we need to make sure that they are going to be able to pay pensions. So, we want to build a portfolio that pro- tects against risk, matches buyout prices, improves the funding level and can easily be transitioned.
PI: What has been your experiences of get- ting to buyout with LGIM, Roger? Roger: For the £17m scheme, I cannot praise LGIM enough. The assets were in- vested into a buyout aware strategy. LGIM did not have those assets for too long because of the way that the market moved. Within months, LGIM contacted me and said we can strike a price and trig- ger a buy-in/buyout. It worked incredibly well. One note of caution. When you get to the buyout price and the liabilities are secure, you have to be patient. There are processes to go through. The data was clean, but the benefit spec had to be produced. Then there is GMP equalisation, which is a pain.
The whole process will be concluded soon, so I can walk away in the knowledge that I have done my deed for the mem- bers of this pension scheme by securing the benefits with L&G.
It has been a great experience. Hopefully, scheme number two, which also is with LGIM, will go the same way.
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