The pipeline of deals that enable companies to offload a chunk or all of their pension liabilities to insurers is the strongest it has been, according to L&G’s chief executive, as the market benefits from rising interest rates.
The risk transfer market, one of the key areas of revenue growth targeted by UK life insurers, has rebounded after a pandemic lull. That has been exacerbated by rising interest rates, which have boosted pension schemes’ funding levels to their highest level in a decade and made a deal viable for many.
L&G did £4.4bn of so-called bulk-annuity deals in the first six months of the year, including its largest ever US transaction and deals with pension schemes for British Steel and Heathrow airport, among others. That compared with £3.1bn in the first half of last year.
The rise in activity helped lift the insurer to a £1.2bn operating profit in the first half, ahead of analysts’ expectations and the same period last year.
“It is fair to say we have more active conversations then we have ever had in the 35-year history we have been doing [risk transfer] business,” said L&G chief executive Sir Nigel Wilson. The same effect meant that some deals expected to close in 2024 were “pulling forward to 2023”, he added.
About £2tn of pension scheme liabilities — essentially, the future payouts to pensioners — sit on UK companies’ balance sheets. In a note published on Monday, JPMorgan estimated that $600bn of this could be transferred to insurers over the next decade.
Its analysts cited the past five years of increasing employer contributions, which alongside higher interest rates have lifted funding levels, as the key factors helping pension schemes to do deals. L&G has a five-year target of £40bn-£50bn in deals for the UK and $10bn in the US.
Elsewhere, L&G’s investment management arm enjoyed record first-half inflows of £65.6bn, but its assets under management fell in choppy markets to £1.29tn from £1.33tn, weighing on profits.
Shares in L&G, which had flagged some of the increased deals volume in a July update, were fractionally lower by lunchtime on Tuesday.
Wilson welcomed the commitment made by both remaining candidates for the Conservative party leadership race to push for a “Brexit dividend” by overhauling the Solvency II rules inherited from the EU.
“We started this project in 2016, it’s now 2022,” he added, referring back to the original push from UK industry and regulators to change the rules. “Six years have passed so far with no measurable progress.”
Rising interest rates helped to lift L&G’s Solvency II ratio — its level of capital as a proportion of the regulatory requirement — from 187 per cent at the year end to 212 per cent, but this was below the expected 215 per cent.
Wilson said the board “wouldn’t hesitate” to buy back shares if it was more attractive to do that, but made the case for investing capital in the group, which posted a 21 per cent return on equity in Tuesday’s results.