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t is set to be a record-breaking year for the bulk purchase annuity market, as conditions continue to be supportive of scheme endgame planning.
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pension risk transfer market
Standard Life’s £1bn full scheme buy-in of the WH Smith Pension Trust
Our journey so far
Delivering what matters to schemes in a competitive market
Will the pension risk transfer market surge continue?
In this Spotlight guide, hear from Kunal Sood, Managing Director of Defined Benefit Solutions and Reinsurance at Standard Life, on the outlook for the year and some key trends that underpin this rapidly growing market.
“The size of schemes we are seeing this year by far exceeds anything I have ever seen previously”
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Next, Rhian Littlewood, Senior Business Development Manager at Standard Life and Myles Pink, Partner at LCP, reflect on what made the £1bn full scheme buy-in of the WH Smith Pension Trust a success.
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Kunal Sood
Phoenix Life Limited, trading as Standard Life, is registered in England and Wales (1016269) at 1 Wythall Green Way, Wythall, Birmingham, B47 6WG. Phoenix Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Phoenix Life Limited uses the Standard Life brand, name and logo, under licence from Phoenix Group Management Services Limited. © 2023 Phoenix Group Management Services Limited. All rights reserved. www.standardlife.co.uk
FOR PROFESSIONAL ADVISERS AND TRUSTEES ONLY Phoenix Life Limited, trading as Standard Life, is registered in England and Wales (1016269) at 1 Wythall Green Way, Wythall, Birmingham, B47 6WG. Phoenix Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Phoenix Life Limited uses the Standard Life brand, name and logo, under licence from Phoenix Group Management Services Limited. © 2023 Phoenix Group Management Services Limited. All rights reserved. www.standardlife.co.uk
We also hear from Tom Ground, Managing Director of Retirement Solutions at Standard Life on why innovation, robust investment in people, and a customer-centric approach are what it takes to deliver what matters to schemes in a competitive market.
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he bulk purchase annuity market has continued on its path of rapid expansion in the UK and 2023 could prove to be a bumper year with both the number of deals and mega-transactions capturing attention. Growth has been driven by the significant increase in
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“Early and detailed engagement allows consultants...to take very educated views as to what is possible with different insurers and that plays a big part for us”
Market conditions continue to be ripe for supporting both the need and demand for bulk purchase annuities, while a range of key industry trends this year will continue to shape the industry on the road ahead
demand amongst pension schemes to de-risk and increased appetite from insurers to provide solutions to help pension scheme manage their liabilities.
As we move forward in a period where interest rates are expected to remain higher than they have been, many scheme assets are working harder for schemes and their liabilities continue to be discounted at a higher rate. As a result, Sood expects both the demand for BPAs to continue to grow and to see some very competitive pricing in the space.
Will this pace of demand continue?
The combination of high interest rates, high inflation and innovative structuring by providers has helped contribute to a dynamic and competitive market; while scheme demand to de-risk has increased due to favourable funding conditions.
the world of investing for several years, but the concept is not new for PIMCO. The bond house first offered clients a socially responsible version of one of its key funds as far back as 1991.
he idea of investing with environmental, social and governance (ESG) principles in mind has been gaining traction in
Additionally, the nature of pension scheme liabilities and the way that they are traditionally managed has also helped to improve the funding position for schemes. “Schemes are hedged for inflation, but their inflation liabilities - the amount that they're paying members - is capped. In some cases, schemes have found themselves earning money from their hedges and so that has improved their funding positions”, says Kunal Sood, Managing Director of Defined Benefit Solutions and Reinsurance at Standard Life, part of Phoenix Group.
“The size of schemes we are seeing this year by far exceeds anything I have ever seen previously. Not all are firmly in the pipeline yet, but we already are and will continue to hear stories about some record-breaking transactions,” he says.
Headwinds that could cause a lull in the market for new transactions are hard to predict. “The liability driven investment speed bump didn’t stall the market, rather it caused a pause until schemes gathered their bearings and then came back with their funding levels mostly still intact,” says Sood.
It is difficult to guess where inflation will land and where rates will go next, but a period of stability could give schemes and insurers a more certain landscape. Nevertheless, schemes must be prepared to engage with insurers to capitalise on opportunity in this buoyant market.
Good preparation is absolutely vital, and schemes and trustees must start by thinking about what they need to prepare in order to be able to approach the market for a buyout transaction. For most, that will include data preparation and a legal review of benefit specifications but will also require having clarity on their investment and funding positions.
Engagement cannot be overlooked
Trustees must have clarity around the make-up of their assets if they want to come to market with ease and efficiency. “What schemes will find is that the composition of their assets will have a significant impact on how quickly they can de-risk their liabilities and achieve buyout. In fact, Trustees could even see that asset composition could have an impact on their funding position that they had not anticipated” says Sood.
He adds that maintaining close relationships with consultants across the market is especially important. “Early and detailed engagement allows consultants, on behalf of trustees and schemes, to take very educated views as to what is possible with different insurers and that plays a big part for us” he says.
Looking ahead, Sood says many of the themes seen last year will persist and continue to create an environment that supports growth in the market.
Trends to watch in 2023
Funding improvements should continue to push affordability within reach for many schemes. “We are seeing a lot of schemes accelerating towards a buyout. Those schemes that were well prepared and making deficit reduction contributions continue on their path towards being buyout ready, whilst those schemes that were un-hedged and otherwise considered buyout a distant objective have had their timescales shortened materially by the market activity in Q4 2022. A large proportion of schemes now have de-risking firmly on their agenda" he says.
With affordability at their highest level in years, Sood says there has been a shift away from sectionalised transactions, with trustees being able to de-risk the entire scheme in one go, as opposed to de-risking pensioners first and considered deferred member liabilities at a later date. “Nearly all cases that have come to market in recent months are full-scheme transactions, whereas we might have seen more of a 50:50 split only 2-3 years ago”.
One critical aspect the market that has been brought to the front by the shifting funding landscape is that a large proportion of schemes have spent the last several years incorporating illiquid assets into their portfolio. For many this has been a sensible investment decision as they make the slow progression towards buyout. However, with rates rising, schemes are closer to buyout than the illiquid assets they hold are to liquidation.
“Additionally some schemes had to use up more of their liquid assets that they might have liked to post collateral in LDI portfolios, leaving behind a much larger allocation to private and illiquid assets than anticipated which can be more difficult to transfer through a buyout,” he says.
“The liability driven investment speed bump didn’t stall the market, rather it caused a pause until schemes gathered their bearings”
Kunal Sood, Managing Director of Defined Benefit Solutions and Reinsurance at Standard Life
£43.8bn
Even though new challenges continue to emerge within the market, Insurance remains the gold-standard for pension schemes. With market conditions and favourable pricing pointing towards an increase in risk transfer activity, 2023 could be poised to be a record-breaking year. Trustees that are best prepared and ready to engage with insurers will be those that are most able to take advantage of the opportunities that we could see over the coming year.
This year, buy-in and buy-out volumes could exceed the record £43.8bn seen in 2019.
Source: LCP
Despite entering the external bulk purchase annuity market just five years ago, Standard Life has driven huge growth, securing a significant market share in a rapidly developing market
“There are probably very few firms that can do business at this scale. Standard Life is one of the more natural market leaders in this space because of our large balance sheet, customer base of 12 million and excellent brand recognition,” says Tom Ground, Managing Director of Retirement Solutions at Standard Life, part of Phoenix Group.
robust investment in people has enabled Standard Life, over the last year, to more than double the number of external transactions in a market that’s seen an explosion in popularity.
tandard Life’s entry into the external bulk annuities market in 2018 could be viewed as a natural home for the firm, given how well diversified and capitalised the insurer is. However, that’s only part of the story. In fact, innovation and the
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Head of Fixed Income at Capital Group.
n 2022, we saw disinvestment and losses for bond funds. But looking forward, we can be optimistic about a year of reinvestment and opportunity, according to Mike Gitlin,
Standard Life is backed by the financial strength and resilience of the Phoenix Group, the UK’s largest long-term savings and retirement business, and a FTSE 100 company. The combination of Phoenix Group’s resilient balance sheet and Standard Life’s strong consumer facing brand, which has provided a safe home for retirement savings for nearly 200 years, gives Standard Life a unique position in the bulk annuity market. Pension scheme trustees are provided with a cost-effective solution and the confidence that the insurer has the balance sheet to take it on.
Standard Life’s momentum is underpinned by two factors: investment in innovation and its people. The insurer has a digital-first perspective that follows through from pricing to end-consumer relations.
A digital-first attitude
“We’ve invested heavily in our digital capability, and have chosen our administration partner, Equiniti, with this in mind. Our digital self-service portal will enable individuals to access a transfer value quotation or retirement quotation immediately, in the time it takes to press the button.” says Ground.
One important end-consumer interaction that Standard Life has built out will allow those customers that have a defined contribution pension scheme with the insurer to be able to look at their defined benefit pension scheme on the same customer portal. This essentially gives customers a joint view and the ability to manage both policies within the same customer portal.
“Pensions are a complicated topic, and being able to support our customers in simplifying the management of their pensions is essential. Many individuals hold both DB and DC benefits, and using our platform, individuals will be able to manage the two policies collectively.” Ground says.
Investment in its people has bolstered the growth and momentum Standard Life has seen since its entry into the external bulk annuity market. At the start of the Covid-19 pandemic in March 2020, the core bulk annuity team consisted of six people, who ran a small but effective bulk annuity franchise
Investing for the long-term
The insurer has made significant progress since then and has built one of the leading franchises in the industry. This has been underpinned by the growth in their strong multi-disciplinary team which stands at around 250 today.
“Increasingly, DB pension schemes are closed to new members and the amount of talented people involved in valuations and servicing of those schemes is decreasing every year,” says Ground. “We quickly realised that what we need to do is start to grow our own talent,” he says.
The insurer has launched a Leadership Accelerator Programme through which they aim to attract talented people who have one to two years' work experience and who want to fast-track their careers with a robust training base across all aspects of the business. The programme has seen 450 applicants this year.
“It’s a win-win for both parties. Our hires will get the experience base to accelerate their career and we’ll get to grow our own talent to support business growth,” says Ground.
The popularity of bulk annuity transactions has soared over the last few years in the U.K. as schemes look to reduce their exposure to longevity, inflation, and investment risks. Trustees, however, remain very conscious of the customer and the end administration capabilities.
Improving outcomes for members
“We've built up a fantastic team of people whose sole job once the trustees have completed a transaction with us, is to step in and provide a seamless handover to our administrative environment,” says Ground. “We understand that a smooth handover is a high priority for trustees, and our team have extensive experience in supporting schemes through to buyout,” he says.
“Our customer-centric approach, coupled with our strong market reputation should give trustees confidence in selecting Standard Life as their bulk annuity provider,” says Ground.
“It all needs to be very seamless for members. That's probably trustees' number one concern in terms of the experience”
Tom Ground, Managing Director of Retirement Solutions at Standard Life
ESG is baked into the business
Supporting housing associations for some of society’s most vulnerable people
£228m
Supporting communities to provide access to care homes, healthcare and education facilities
£75m
Supporting renewable energy production and sustainable transport
£483m
Sustainability-linked loans and social impact investments
£207m
However, growth in the industry is not without its challenges. One of the key factors limiting the growth of the BPA sector is market capacity.
In 2021, Standard Life more than doubled their 2020 volumes, writing £5.6bn of bulk annuity volumes and securing a 20% market share. Standard Life’s success maintained momentum in 2022, with annual bulk annuity volumes confirmed at £4.8bn
Year-on-Year Growth in External Transactions
2017
2018
2019
2020
2021
2022
£6bn £5bn £4bn £3bn £2bn £1bn 0
Year
2016
Total
Total Standard Life BPA volumes
£1.1bn
£0bn
£2.2bn
£2.5bn
£5.6bn
£4.8bn
£16.7bn
£0.8bn
Number of transactions
1
0
5
6
7
13
35
3
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Source: Phoenix Sustainability Report 2022
Example of intuitive member portal for managing DB pensions
0.8
1.2
2.2
1.8
2.5
4.0
5.5
4.2
4.8
Standard Life external BPA volumes
Explore our track record of completed transactions and achievements over the past six years
First full scheme buy-in completed with PerkinElmer
£130m
Buy-in with the Imperial Tobacco Pension Fund, our largest transaction to date
£1.8bn
Our second largest transaction to date, a full scheme buy-in with the Gallaher Defined Benefit Pension (DB) Scheme
£1.7bn
Completed our first bulk purchase annuity transaction for our own internal pension scheme (PGL)
£1.2bn
Grew our expertise and built infrastructure
Prepare to take our solution to the external market
Completed our first external transaction
Begin a relationship with M&S, spanning 3 transactions over 2018 – 2020
Experience grows, volumes grow
£2.2bn of transactions completed
External transactions volume exceed internal
Completed 6 transactions in 2020
Bulk annuity volumes
Market share achieved
20%
Of transactions including deferred members (2021-2022)
£6.4bn
Number of completed transactions in 2022
Thirteen
Pension scheme members’ benefits secured to date
104,000+
Value of deals completed to date
£16.7bn+
Launch Equiniti partnership
Provide digital member experience
Celebrate two industry awards
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Case study: Standard Life’s £1bn full scheme buy-in of the WH Smith Pension Trust
In this Q&A, Rhian Littlewood, Senior Business Development Manager at Standard Life, part of Phoenix Group and Myles Pink, Partner at LCP, reflect on their experiences and learnings from a significant transaction that featured not only rapid and efficient execution, but also reinforced Standard Life’s ongoing commitment to the bulk annuity market
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“We’re focusing on positions where there may be some price fluctuations but where there is unlikely to be a long-term permanent impairment of capital”
Alfred Murata, Portfolio Manager
Myles: This Scheme was sponsored by the WH Smith Retail business. It had a sister scheme that was sponsored by the News business, which was bought-out in 2019. The Trustees therefore had experience of insurance de-risking and knew that this was their target for the Retail section too. The company supported the Scheme well over the years, providing significant contributions to improve the funding position. Equally, the Trustees were focussed on de-risking the Scheme assets over time as the funding position improved, to lock in that improved position.
Can you give some background on the scheme and its approach to the market?
Rhian: The Scheme came to market well-prepared and organised; data was in good shape, and the Trustees were clear on what they were looking for. This meant we were able to spend a lot more time focusing on where we thought we could deliver value for the client. We had high certainty that the transaction would complete quickly and smoothly which meant we were prepared to commit our resources to make sure we put forward the best possible proposal.
How was the preparation work carried out by the Scheme before approaching the market, helpful to Standard Life in the quotation process?
Myles: The most important thing was getting some price certainty in a volatile market. The war had just broken out in Ukraine and there was a lot of volatility in both asset pricing and the cost of inflation hedges. It was also important to work with an insurer that was going to be able to deliver to the timetable that we needed to follow, targeting signing of the transaction before the end of August 2022. The Trustee and Company were also seeking comprehensive residual risks cover at a fair price.
Were there any unusual or interesting features about the transaction that presented challenges?
Rhian: The big advantage that we had was that Myles and his team were very clear about the Scheme’s requirements and timescales, so we weren't left guessing. We were able to identify early on that this was a scheme that was in good shape and ready to go. When we looked at it, we knew that we could meet all the requirements and do that comfortably by the end of August.
How did Standard Life work with the transaction advisers to meet the Scheme’s requirements and timescales?
However, to do that, we wanted to agree on headline terms with the Trustees quickly. We worked with LCP to agree on what the Trustees would need to see in order for them to want to work with us. That conversation gave us enough confidence to say “right, we're going to make this work. We're going to put the resources and the effort into delivering a proposition that ticks all these boxes.”
Myles: Price was important. If you think of the markets as a “third party” in these transactions, that can offer opportunities, then the insurer and trustees must work together to get the benefit out of that third party. As Rhian says, we were ready to move but equally, we could see that Standard Life was also ready to move to capture the pricing opportunity for the Scheme.
Why did the Trustees decide to select Standard Life?
The first test in deciding whether to select Standard Life was the clearing down of as many as possible of the terms in the core buy-in contract, in the space of about 10 days, in order to give us the bandwidth to focus on the more bespoke terms such as those relating to residual risks cover. Rhian and team came back with a clean bill of health on these core terms within the 10 days demonstrating Standard Life’s strong commitment to the Trustees.
We could then focus on the more bespoke terms and getting a very robust price lock-in mechanism in place to ensure that there would not be a “slip between cup and lip” in volatile markets, over the few weeks between selecting Standard Life and transferring the assets to them.
This was the largest transaction for Standard Life by a significant margin in terms of the number of deferred members insured. So gaining a high degree of confidence and trust was very important for the Trustees. Rhian and team were demonstrating that Standard Life will deliver on what they say they will do - not only minimising execution uncertainty but also setting a sound basis for the long-term relationship with members of the Trust.
Rhian: When I reflect on it, what stands out is how smoothly the whole process ran. That perhaps plays down the very hard work on all sides, but the reason it felt so smooth is because the communication was very good. Not overcomplicating a process such as this is a real skill. It’s important to focus on what matters the most and keep things as straightforward as you can.
What are some of the key learnings from this project?
Myles: From our side, we made sure the Trustees not only had a clear understanding of a realistic price target, but also what contractual terms to expect. They had a very good idea of what they were buying from an early stage in the process.
The team at Standard Life really understand what it is that trustees are looking for and they understand their language, even when it's different from that of insurers.
“We were able to cut out a lot of noise and just really focus on what was going to add value and help us put together the best proposal we possibly could for the client”
Rhian Littlewood, Senior Business Development Manager
Full scheme buy-in
£1bn
13,000
“Gaining a high degree of confidence and trust was very important for the Trustees. In committing to the process, Standard Life were demonstrating that they will deliver on their promises”
Myles Pink, Partner at LCP
Standard Life’s full scheme buy-in of the WH Smith Pension Trust
Members of WH Smith Pension Trust covered
