Aviva: Pensions: focusing on individual solutions – Nick Johnson
While pensions derisking is widely discussed, many corporates are unable to afford a large bulk transaction. Nick Johnson of Aviva
explains the advantages of taking a more member-oriented approach.
Over the past few years, pensions derisking has come to the forefront of trustees' minds. No longer are defined benefit schemes deemed advantageous, as awareness of the potential financial downside of the risks exceeds their perceived value as employee benefits. Many employers are looking to close their schemes and, in the meantime, to offload the associated liabilities.
Various strategies for doing so have been discussed. Particular attention has been paid to annuity buy-ins and buyouts, which involve working with a trusted counterparty to dampen the risk. Unfortunately, companies do not always have the assets they need to transact.
"Just as people become aware of derisking and are taking actions to do so, the affordability is getting worse," says Nick Johnson, sales director, at retirement at Aviva. "With investment returns being low and gilt yields falling, the financial status of schemes isn't great. Prices are also being driven up from a capital intensity point of view."
This being so, the temptation for many corporates is to keep doing what they're doing and hope matters will improve. Nonetheless, as Johnson explains, this option is beginning to seem unworkable. He believes the industry is on the verge of taking a very different view.
The bespoke approach
The classic model for derisking was to undertake a large bulk transaction, which would theoretically heighten affordability through providing economies of scale. However, nowadays trustees are paying heed to the diversity of requirements covered by a single scheme. They are starting to move away from a 'big deals' mindset towards a more member-oriented approach.
"There's just started to be a market for individual underwriting for members, rather than pricing schemes on a bulk level," says Johnson. "This is new, and it's more aligned to what happened in the individual annuity market. For the trustees it's about trying to understand what that actually means in terms of protecting members' interests."
In essence, the trend is towards better engaging members with the process. By transferring the value of their benefits, employees can secure an individual annuity that better suits their own requirements. Meanwhile, trustees move away from a catch-all paternalistic model while avoiding the financial fallout of a one-time buy-in.
This strategy bodes well for all parties. "You've got the trustees looking after the members' interest, you've got the employer looking to do something that's affordable, and you've got insurance companies ensuring the risks are properly priced," says Johnson. "And through offering members increased flexibility, you can make it attractive for them to leave the scheme."
For its own part, Aviva has just brought together its bulk and individual business, and is looking to apply the lessons learnt from the individual side. "Individual annuities are all about flexibility, and recognising customer needs. We're trying to bring these concepts into the bulk market too,"says Johnson. "It's all about individual choice, provision of information and taking the members on a journey."
Individual underwriting is of course a new approach and with it comes a more protracted timescale. "It's not just a one-off exercise that gets risk off your balance sheet in one go, it's a much longer journey," explains Johnson. "So you're looking for a partner that can help you through all those steps and give a well-rounded offering - and is going to be here over the lifetime of that journey."
Bigger and better
One of the largest insurers in the UK, Aviva is equipped to offer clients that security. With more than 300 years of heritage and 43 million customers across the globe, the company is perennially at the forefront of upcoming developments. Fully attuned to market developments, Aviva's understanding of the needs of corporates, trustees and customers helps to drive its product development.
As new and more nuanced solutions arise, corporates have little to gain from clinging to outworn approaches.
"A scheme is made up from a lot of individuals, and what's right for one individual may not be right for others," Johnson says. "So it's a question of thinking of derisking on that level, and looking at the art of the possible."