Delivering legacy life insurance and pension product simplification

Out-Law Analysis | 24 Nov 2022 | 4:26 pm | 2 min. read

Transformational change is taking place in the UK’s life insurance and pensions sector – but adapting will require many businesses to address their complex pasts.

The advent of auto-enrolment, ‘Freedom & Choice’ and the regulatory focus on customer outcomes are new challenges facing pension firms. At the same time, customer wants, needs and demographics continue to shift, and technological innovation offers new opportunities and obstacles. The industry will need to work hard to succeed in this dynamic environment.

Doing so will involve product and process simplification, along with greater automation to drive operational efficiency. The inherently long-term nature of life and pensions products means the sector still has an awful lot of history to contend with, including market consolidation and books of legacy business resulting from Part VII transfers.

Addressing that history is rarely straightforward. One of the key challenges is bringing legacy legal obligations into line with wider operational and capital efficiency measures. ‘Legacy simplification’ is not just a picture of what ‘good’ looks like – it encompasses the various legal techniques, mechanisms and processes that get you there. 

Legacy simplification toolkit

Legacy simplification is the way to achieve deliver operational improvement, improved capital structures and competitive differentiation. There are various ways to approach it.

The inherently long-term nature of life and pensions products means the sector still has an awful lot of history to contend with, including market consolidation and books of legacy business resulting from Part VII transfers
Administration upgrades

Administration upgrades deliver harmonised benefits through modern systems and aligning existing contract terms with the new harmonised benefits. Legacy systems are under increasing regulatory pressure, are expensive to maintain and frustrate wider business benefits. Harmonisation reduces the operating expenses associated with maintaining legacy systems.

With-profits compromise

This involves conversion of with-profits products to unit-linked in exchange for a one-off uplift. With-profits business continues to be of decreasing importance to many firms, as it is mainly legacy business in run-off. With-profits conversion might be performed alongside fund consolidation of legacy ring-fenced funds to achieve diversification benefit. The nature of with-profits funds makes them challenging to manage, including from a risk capital perspective.

GARS compromise

The guaranteed annuity rates (GARs) compromise offers a one-off uplift in exchange for the guarantee associated with annuity purchase options. These guarantees are particularly onerous in periods of low interest rates. Despite providing a valuable benefit, customers are less likely to annuitise following ‘Freedom & Choice’, and GARs can interfere with the transfer process.

These are, of course, just examples. Pensions and life businesses should start with the objective of a more efficient legacy business and, by one means or another, legacy simplification will be the way to get there.

How to implement changes

The toolkit of legal techniques, mechanisms and processes include schemes of arrangement which require a court to approve some give and take with customers and using powers in legacy customer policies to effect change by way of endorsement or similar methods. 

Change and innovation are not just the drivers for legacy simplification, they are part of the delivery too. Not only is the toolkit being deployed in ever more innovative ways, but technology and automation now help to streamline due diligence projects which identify the contractual impact of change. This is a big leap forward, making certain challenging projects feasible in terms of time and project costs.

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Digital transformation is accelerating in the financial services sector, particularly in the wake of the global pandemic. We investigate the legal and regulatory landscape in financial services technology and highlight the opportunities for change.
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