Partnering with LGRI for our DB clients

With bond yields typically moving inversely to the value of a DB scheme’s future liabilities, the notable move higher in yields over the past 18 months has led to a corresponding reduction in best estimates of future liabilities for the average scheme. While asset values have also fallen, they have generally done so to a lesser extent than the expected value of the future pension payments they need to meet.

This means the funding level of the average DB scheme has continued to rise. So much so in fact, that we estimate around 25% of schemes are already fully funded on a buyout basis. But the demand from schemes that are already – or soon will be – in surplus is a multiple of the annual capacity of the pension risk transfer (PRT) market.

As a result, we believe we’re likely to see schemes adopting a ‘holding pattern’ as they prepare for a potential buyout, when an insurance company takes full responsibility for paying their members’ pensions. 

To help our DB clients during this time, we’ve been working with our partners at LGRI to deliver a wide-ranging suite of informative materials.

These include an in-depth whitepaper on how schemes can construct portfolios as they await their endgame, one podcast giving an introduction to buyouts and buy-ins, and another describing how LGIM and LGRI work in partnership to deliver endgame solutions for clients.

In addition, we’ve published a suite of buyout-focused DB blog posts covering a range of topics including:

• How to hedge buyout surpluses
• The importance of credit as endgame approaches
• Gentle glidepaths for foggy funding levels
• Explicit and implicit hedging for buyout

The work between LGIM and LGRI on providing endgame solutions for DB clients is a flagship example of Legal & General’s mutually reinforcing business model, whereby one division of our Group provides a natural partner for another as we seek to provide a seamless transition for clients along the entire path of their pension scheme’s journey.