Legal & General’s
Assured Payment Policy (APP)

Case studies

We advised the Legal & General Group UK Pension and Assurance Fund as they executed a £925m APP covering their pensioners and deferred members, the largest APP transaction to date.1

This was L&G’s third APP deal to date, having previously completed a £250m deal with the AIB Group UK Pension Scheme at the end of 2019, and a £400m APP deal at the end of 2020 for the Legal & General Group UK Senior Pension Scheme.

What is an APP?

L&G launched APP which was developed to help schemes on their journey to buy-out. Under APP a pension scheme receives a pre-agreed series of cashflows from L&G, in exchange for an upfront premium. The payments received by the scheme:

  • reflect actual inflation experience, including any caps or floors.
  • do not reflect demographic experience eg mortality experience or when members retire.

It can therefore be thought of in two different ways:

  • Buy-in without longevity protection: Pension schemes lock into bulk annuity pricing, other than the cost of insuring longevity and other demographic risk. Investment risk is removed and the demographic risk can be insured as and when it becomes affordable to the scheme (ie converted to a “vanilla” buy-in with L&G).
  • Super-LDI: APP is a tailored bond that perfectly matches the scheme’s pension increases, both in deferment and retirement, with a return in excess of gilts. The APP can cover all the expected benefits under a scheme, or a subset. Similar to LDI, the payments from L&G can to be rebalanced periodically if they diverge from payments to members, and there is also the flexibility to surrender part of the policy for liquidity if needed (for example for transfers out and other member options).

Might an APP be appropriate for my scheme?

Because an APP does not include longevity protection the price is lower than a buy-in, particularly for non-pensioners. In addition, under an APP, the scheme continues to make a gain relative to buy-out pricing as members retire and/or take up member options. APP suits schemes that:

  1. Are targeting buy-out, but are some way off being fully funded – an APP costs less than a buy-in and can be converted into a buy-in with L&G in the future by adding the demographic protection.
  2. Have hard-to-hedge pension increases – one of the big benefits of APP is that it hedges pension increases perfectly.
  3. Wish to target non-pensioners (eg because they already have a pensioner buy-in) – the cost of an APP is broadly the cost of a buy-in without the cost of insuring longevity risk. This longevity protection is much higher for younger members and so, compared to a buy-in, the cost of an APP is particularly attractive for younger members.

By not insuring longevity protection schemes which go down this route leave themselves exposed to longevity risk (and insurer pricing risk on that element), but for some schemes APP transactions are an affordable first step on their journey.

1 At time of publication, September 2021

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