Legal & General (L&G) is to launch a suite of ‘Buyout Aware’ investment funds for UK defined benefit (DB) pension funds in a bid to develop a bridge between its investment and bulk annuity divisions.

Looking to maintain Legal & General Investment Management’s (LGIM) share of UK DB assets, and support L&G’s annuities business after this year’s Budget, the “delegated solution” will see it provide buyout-designed investment funds for small and medium-sized schemes.

However, consultants warned of negative impacts on the bulk annuity market’s competitiveness should it become popular.

The funds offer exposure to liability-driven investments (LDI) and corporate bonds, so assets reach buyout-pricing level.

LGIM will also track buyout pricing using credit investments and taking regular advice from the bulk annuities business on the direction of pricing levels.

Third, the insurer is undercutting rival bulk annuity providers by waiving the cost of transferring assets from an investment manager to an insurer, if LGIM clients insure with L&G.

The manager said this could shave around 50 basis points off the cost of a bulk annuity purchase.

Aaron Meder, head of LGIM’s Solutions Group, said the delegated solution allowed LGIM to pay more attention to clients’ overall aims.

“We have made buyouts simpler and more affordable for UK pensions schemes,” he said.

LGIM is one of the UK’s largest managers of DB assets, mainly within LDI and index-tracking equity funds.

Meder said the manager losing assets to non-related insurers as schemes bought out was “not a great outcome” for the L&G umbrella group.

James Mullins, a partner at consultancy Hymans Robertson, said the funds could prove very popular, given the interest in buyouts from smaller schemes and concern over appropriate asset allocation.

However, he warned of there being no perfect solution to tracking and hedging buyout costs while remaining in a competitive insurer market.

“Pension schemes would still go out into the market, and the most competitive insurer winning would still remain the case,” he said.

“I imagine the other insurers will react to the 50bps [savings], which could be good news for the entire market.”

Dominic Grimley, principal consultant at Aon Hewitt, said L&G’s 50bps saving figured raised questions.

He said the whole concept would be negated if, as Mullins suggested, rival insurers dropped their fees.

However, he suggested other insurers could become less likely to quote on LGIM clients, leading to L&G not pricing competitively.

“An extreme viewpoint, but not impossible,” he said. “So the client actually loses out rather than gaining anything on buyout, especially if the case is not attractive in other respects for an alternative annuity provider.”

He also warned that some schemes would not want to match buyout pricing tightly for a prolonged period.

“Matching pricing will mean other measures – such as accounting and scheme actuary valuation of liabilities – [are possibly not] being matched,” he said.

“A managed level of mismatch risk may create that level of volatility that may actually help reach a target.”

The corporate bonds in which LGIM invests, he said, would be ideal for L&G’s bulk annuities arm but may not be the best priced asset for other annuity providers.

LGIM said the delegated solution would not block schemes from transacting with another insurers.

However, schemes would have to account for asset mismatch and transaction costs.

Meder also stressed that the manager was not entering the fiduciary management space, as this offering lacked independent advice and manager selection.

“We’re offering an approach to implementing partial or fully delegated solutions,” he said.