Legal & General plans rival product to compete with new pension superfunds

[August 23, 2019]  By Carolyn Cohn

LONDON (Reuters) - UK insurer Legal & General <LGEN.L> aims to take on incoming pension superfunds with a similar product of its own to bolster corporate retirement schemes, a company executive told Reuters.

Legal & General is already talking to employers and regulators about the product, which would be suitable for schemes that may not be able to afford a so-called bulk annuity - insurance that pensions will be paid in full - Laura Mason, CEO of Legal & General retirement institutional, said.

"We are working with a couple of (employer) sponsors," she said, adding that the product could be used by pension schemes with a "medium" level of funding. Mason did not give a time scale for the launch of the product.

Pension superfunds are a new pension investment model due to come on the market next year in Britain. They consolidate collective assets from various pension schemes, aiming to benefit from economies of scale and manage the money more efficiently.

Mason said L&G's product would be similar to a pensions superfund, but would not involve a total split of the pension scheme from its employer sponsor.

L&G is one of the biggest players in the bulk annuity market, which involves insuring company defined benefit, or final salary, pension schemes. Bulk annuity sales boosted L&G's first-half operating profit, after the company agreed Britain's largest ever bulk annuity in June, a 4.6 billion pound ($5.6 billion)deal with the Rolls Royce <RR.L> UK pension scheme.

The market is growing as companies seek to address huge deficits in Britain's 2 trillion pound final salary pension sector. Consultants predict up to 40 billion pounds in bulk annuity deals this year.

But critics say they are expensive, particularly for those schemes which are in deficit. For this reason, most pension funds which take out a bulk annuity are already well-funded.
 

The logo of Legal & General insurance company is seen at their office in central London, Britain, March 17, 2008. REUTERS/Alessia Pierdomenico/File Photo

The pension funding problem is Europe-wide, as people live longer and as years of central bank stimulus has depressed interest rates, leading to gaps between the fixed sums the pension schemes pay out and their investment income.

Britain's pensions industry has come up with the pension superfund model, which focuses on schemes which are not so well-funded, but differences over how to regulate the superfunds have delayed the first deals until next year.

New firms Clara Pensions and The Pension Superfund have said they have deals in the pipeline.

While The Pensions Regulator is expected to regulate the superfunds, L&G's product will be regulated by Britain's insurance regulator, the Prudential Regulation Authority, Mason said.

Some insurers see the superfunds as competition to the traditional bulk annuity market, while offering less protection to pensioners than a bulk annuity. But Mason said there was room for different types of company pension products.
 

"It's a massive market," she said, adding that the newer products would "give the underlying scheme members better security compared with where they are today".

(Reporting by Carolyn Cohn; Editing by Susan Fenton)

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