Aviva: A grown-up approach to pensions: Nick Johnson

With more and more defined benefit pension schemes looking to de-risk, the market for risk management solutions is starting to mature. Aviva's Nick Johnson explains why this is less about offering new products, and increasingly about adopting a more collaborative approach.

Of late, the risk management landscape for defined benefit pension schemes has become vastly more sophisticated. With many new solutions on the table, ranging from bulk buyouts and buy-ins to longevity swaps - and even the method of auction used to choose a provider - scheme trustees are being asked to choose from an ever-evolving set of options.

Bulk annuities, for instance, have changed almost beyond recognition. Whereas five years ago, a bulk annuity was little more than a bundle of individual annuities, it has since developed into a complex and customisable product.

"The amount of bespoking, along with the scheme-specific elements that shape what the bulk annuity looks like, has grown exponentially," explains Nick Johnson, head of defined benefit pension risk at Aviva. "This is not merely an off-the-shelf product, which you can choose to buy or not, it's something for which we ask, 'What could we do extra to help you purchase this?'"

For an insurance provider like Aviva, the task is to assist schemes manage down their risk. If there is something specific that has previously prevented that scheme from transacting, Aviva will sit down with the trustees and discuss their perceived obstacles to success.

"The critical thing is to pick the right provider. You need to have full confidence in whoever you choose, selecting a partner you believe will be around for the life of the scheme."

Key to the company's mission is an understanding that no two pension schemes look alike. A scheme may have grown up over a number of decades, taking in numerous changes to trustees and administrators in that time and as many changes in legislation.

"The history behind each scheme is different," says Johnson. "When you throw its funding levels and investment strategies into the mix, you see that every pension scheme is in a unique position. All these issues determine whether you can do a deal and what risks you're willing to accept as part of that."

Generally, schemes benefit from having a range of tools in their armoury. Because liabilities manifest themselves in various forms - interest rates, inflation and longevity risks among them - it can be worthwhile implementing several different solutions.

For example, Johnson believes that longevity swaps can represent a useful step on a de-risking journey, but that they should be viewed in a similar way to synthetic investments within your scheme rather than a comprehensive answer.

"Longer term, you need to ask what is the real worth to you, how marketable is it, and are you going to get realisable value for that asset?" he says.

Working relationships

Concurrent with the diversified product offering is a change in the relationship between sponsor, trustees and insurance provider. "There has been a shift of opinion," says Johnson.

"It used to be the case that companies would do the difficult bit themselves, and treat the insurance company simply as the provider of a product. History has shown that this process isn't particularly efficient - many schemes would get to the final transaction before companies realised they couldn't actually afford it. They didn't have perfect information from the outset."

These days, rather than looking at insurance providers as an opponent to win against, trustees and sponsors are embracing a new spirit of collaboration. With the shared goal of a transaction, the focus is on working together and openly sharing information to ensure that this contract will take place.

The critical thing is to pick the right provider. You need to have full confidence in whoever you choose, selecting a partner you believe will be around for the life of the scheme.

Aviva is a major player in this market. The sixth-largest insurance company in the world and the biggest in the UK, it benefits from a long track record, and continues to develop in accordance with new demands.

"Over the last five years, insurance companies have been on a steep learning curve," points out Johnson. "Initially, the market was almost embryonic - it was a question of 'can we do a deal, who will give us the cheapest price?'. Now it's got to the stage of, 'how do we work together to transfer pension risk to the insurer?'. That requires a grown-up, joined-up approach."

Nick Johnson, head of defined benefit pension risk at Aviva.