An interesting cover story in the Financial Times from 25th October, though like so much in the insurance industry the real picture is perhaps a little more complex than a glance at the headline might infer.
It’s clear that the DC/platform and Drawdown businesses of certain life insurance companies have indeed benefited from the surge in transfers out of Defined Benefit pension schemes since the policy was announced as part of the UK government’s pension reforms in 2015. Likewise, there can be no denying that transfer values are currently high – largely due to the impact of tighter bond yields in the market – and this has fuelled a boom in activity by advisors, insurers and corporate sponsors alike. Whether or not this automatically translates into higher profits for the life insurance industry is, I think, more questionable.
The backdrop for DB transfers is of course the UK pensions reforms announced back in 2015, which were billed as a liberation for individuals who had saved hard throughout their working lives but lacked the freedoms by which they could benefit as they reached or approached retirement age. This would represent, to use the politicians’ rehetoric of the time, a victory for individual choice over the more constrained, formulaic and paternalistic assumptions which had governed pensions planning in the post war period. In particular, retail annuity providers were portrayed as operating in a slightly ‘cosy’ market, which needed an injection of competition. With the more fundamental pensions problem of the UK (and elsewhere) caused by an ageing, post-industrial population and low interest rates needing urgent address, the Transfers industry has developed into an important tool by which corporates which may be weighed down by defined benefit liabilities can address the problem, alongside bulk annuity, longevity swap transactions and other liability sided reforms. Josephine Cumbo’s article rightly points out that some FTSE listed companies have been, er, 'energetic' in their attempts to present employees with their option to leave DB schemes and it’s clear that a few practitioners in the IFA industry have indeed used some questionable marketing tactics to encourage transfer. There’s a whiff of miss-selling and even a hint of scandal, but are the profits of the insurance industry really a causal factor?
Firstly, insurers charge for managing the assets held by existing DB schemes through their managers and annuities departments, just as they do to manage drawdowns or other platform activity, and since management charges for institutional and retail funds alike are these days are so competitive it’s difficult to see where the net gain is for insurers. Certainly, in order to be profitable enough for a listed insurer to persist with the business, DC platforms need to achieve significant economies of scale - as Zurich UK’s recent sale of its workplace platform business to LBG illustrates. Likewise, it’s far from inconceivable that more profitable bulk annuities businesses run by insurers with more capital heavy models could lose business as a result of Transfer activity – though I would add that demand for bulks remains healthy.
The second point is more obvious: Drawdown/platform products are not only offered by life companies but also by any large asset manager which has a significant DC or retail investments business eg Fidelity, BlackRock. Not only does that place DC/drawdown within a highly competitive market sector, but it also means that insurers are far from being the only beneficiaries. DB transfers do not require a life insurer to act as intermediary and with the help of an IFA transfers can be arranged directly to any large pensions manager - whether that manager is owned by a life company or not. What is not in doubt is that some life insurers are more willing than others to write annuities (e.g. L&G do, Standard Life do not). Erik Vynckier, a prominent life insurance CIO and partner at insurance PE specialist InsurTech Venture Partners points out that, “There is a move in the industry from those annuity companies who were previously heavily involved in retail or enhanced annuities, to shift their business out of retail based products and towards bulk buy-outs. But there is also a different trend elsewhere - away from what used to be annuities business and towards what is now platform/asset management business. Those asset managers with a platform that can take in drawdown pensions money are now benefitting, as well as the life companies that particularly cater to this such as Standard Life or Aviva. This is a strategic matter for the insurers, who now have to contend with asset managers and some will fare better than others”.
Likewise, the drawdown market represents a major shift for insurers from the more ‘sticky’ annuities market which preceded it: “This originated as a move from “captive” retail annuity money, which an insurer kept for sure, as the annuities were/are not transferable, to a drawdown product, where the client can move his money as he or she sees fit. If you mismanage the money, you do not have 20 years of fees and even if you manage it well, some clients will move. Within tax efficient limits, you can draw down promptly without tax penalties, take the cash, and do as you please. If your plan is unattractive, you can move to another provider or move it to your bank account.”
It’s worth remembering that the 2015 pensions freedoms were borne our of deliberate decisions made by the government and implemented by Parliament and HMRC. The life industry had little input to the process – some of which resulted in major restructuring, with a considerable financial impact on the industry. For those that have subsequently benefitted by redirecting annuities assets towards their retail fund products, you might say “good luck to you”…
Britain’s biggest life assurers have gained billions of pounds of new business as a result of contentious pensions reforms. In the past two years, about £50bn has been released from corporate pension schemes as tens of thousands of people swap their guaranteed retirement income for a lump sum, according to Mercer, the consultants. One pensions administrator, Broadstone, said that Standard Life Aberdeen, Royal London, Prudential and Aviva had been among the biggest beneficiaries of the pension transfers it has processed. Standard Life Aberdeen is one of the few companies to disclose details about the amount of money it is taking in from defined benefit transfers. In the first half of this year, Standard Life took in about £900m to its drawdown products from the transfers. Standard Life completed its merger with Aberdeen Asset Management in August.