Legal & General Seals Second US Pension Buyout

Legal & General (L&G) has taken on $65 million in liabilities as part of its second US pension-risk transfer (PRT) deal.

The agreement was struck with the Pension Plan for Lay Employees and Sisters and Brothers Within the Diocese of Palm Beach under the advisement of USI Consulting Group.

It follows L&G’s entry into the US market in October, when it split Philips’ $1.1 billion bulk annuity with Prudential and OneAmerica.

“The US is a key market for Legal & General and we are uniquely positioned with our US life insurance company, rapidly growing investment management business, and US pension-risk transfer operations,” said Kerrigan Procter, managing director of L&G Retirement. “I am excited to continue to build on the global success that we saw last year as we continue our push into the US market.”

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As of June 2015, L&G had amassed a global annuity book of over $68 billion. The insurer took on an additional $450 million as part of the Philips buyout in October.

While pension-risk transfers have yet to be widely adopted in the US—transactions between 2007 and June 2015 totaled just $67 billion, compared to $180 billion in risk-transfer deals over that time period in the UK, according to Prudential—the demand for PRT deals in the US is “rapidly increasing,” said George Palms, president of L&G Retirement America.

“This is another important milestone in our US pension-risk transfer business,” Palms continued. “We are confident that we are strongly positioned to be a major player in this growing market.”

As part of the buyout, L&G Retirement America will administer the payments to Diocese pension annuitants. L&G Investment Management America will manage the assets.

Fund manager pay is set for an industry-wide overhaul in the next few years as investors and regulators demand more transparency, according to a report from PwC.

“Beta masquerading as alpha will be less significantly rewarded.”With asset management margins falling and operational costs rising even as total industry assets increase, staff pay will fall relative to assets in the next five years, the accountancy and consulting firm predicted. PwC foresaw a 59% increase in total investable assets to $102 trillion by 2020, making asset management the “biggest single component of the financial services sector.”

“Increased costs and pressure on fees will squeeze margins,” PwC’s report stated. “At the same time shareholders will demand improvement in returns. As a result, pay may not increase at the same rate.”

The link between staff rewards and client outcomes should deepen, the report said, rather than corporate performance-tied compensation, “over which many employees have limited direct influence.” The rise of “passive and alternative strategies” will also drive firms towards compensation based on team performance rather than star managers.

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Already many firms are paying employees via deferrals into their own funds or company shares, PwC reported. “Around four in five firms have broad-based deferral plans in operation and, of these, 50% now operate deferral into funds,” the company said.

At the same time, demands from investors and regulators for better transparency and governance will lead to “an increased requirement for significant levels of pay to be robustly justified,” the report continued. “Beta masquerading as alpha will be less significantly rewarded.”

Asset management firms should also prioritize talent development to solidify succession plans for critical staff members, PwC said. More than 80% of companies surveyed said they had a formal succession plan in place for employees, but “only a small number” made appointments through these processes in 2014.

“Preparation can be key to reducing reputational harm and maintaining investment performance in the case of a high profile departure,” the report stated.

Developing and maintaining a good workplace culture will also be important for asset management firms to succeed in the long term, PwC argued. “An inclusive, satisfying working environment with career development opportunities not only contributes to keeping talented individuals happy, but also attracts investors who reason that an organization with an ethos based on teamwork and synergies is more likely to generate new ideas and bring them to fruition,” the report said.