FINANCIAL services business Legal & General is banking on an uptick in the number of companies de-risking their defined benefit pension schemes to boost its profitability in the current financial year.
After unveiling a seven per cent rise in pre-tax operating profits for the first six months of the year, chief executive Nigel Wilson said the business expects to secure deals on billions of pounds worth of pension assets in the second half.
“We are currently actively quoting on over £20bn of UK pension risk transfer deals, including over £7bn of transactions in exclusive negotiations expected to close in H2,” he said.
In its accounts for the year the company said that demand for bulk annuity deals “is expected to reach new heights” as a result of “improved pension scheme funding levels”.
Read more: Earlier deaths see Legal & General profits rise 27 per cent to £988m
With some reports estimating that UK pension scheme deficits halved over the last year on an aggregate basis, Legal & General said that more schemes are expected to be able to divert cash to funding de-risking strategies.
“The UK private sector defined market is estimated to have £2.3 trillion of liabilities, with only around 7% transacted to date,” the company said.
“The trend toward decreasing deficits and improving affordability of buy-outs means we expect further growth in this market.”
Insurance buy-in and buy-out deals allow schemes to offload some or all of their liabilities to an insurance company, which receives a premium and a chunk of assets in exchange for paying the pensions of specific scheme members.
In June Legal & General agreed a £325m deal with Heathrow Airport that will see the insurer pay the pensions of 1,300 members of the £4bn BAA Pension Scheme. Heathrow issued a £160m inflation-linked bond to Legal & General as part of the deal.
After a rise of 9% Legal & General’s retirement business, which includes workplace defined contribution pensions, contributed £480m of the group’s total first half profit figure of £1.1bn.
A statutory rise in auto-enrolment contribution levels in April helped drive an increase in net inflows into defined contribution funds from £1.7bn to £3.5bn. The number of customers on the group’s workplace pension platform also increased, from 2.4 million to 2.9 million, while assets under management were up by 15% to £72.3bn.
The business expects its retirement arm to continue to benefit from its target market growing “both in terms of the numbers of retirees and the levels of wealth they hold”.
While all other parts of the business saw profits rise in the first half, Legal & General’s general insurance arm saw a £15m profit in the first half of 2017 turn into a loss of £6m.
Read more: Legal & General toasts record full-year profit
It said this was “largely as a result of weather experience in Q1 2018, in line with the wider market” but added that it expects profits in the second half of the year “to return to levels consistent with previous years”.
Meanwhile, although profits in the firm’s investment division were up by 5%, the income it received from investment management fees rose by just 4%.
“Fee revenues were impacted by lower asset values in Q1 due to challenging market conditions, offset in part by external net inflows of £14.6bn [down from £21.7bn],” the firm said in its accounts.
Shares in the firm, which will pay an interim dividend of 4.6p, closed unchanged at 264.5p yesterday.
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