CompanyGraph
Legal & General Group plc
LGEN · United Kingdom
Transfers defined benefit pension liabilities onto an insurance balance sheet by matching them against self-originated infrastructure debt under Solvency II capital constraints.
Legal & General transfers defined benefit pension liabilities onto its balance sheet through bulk annuity transactions, each creating a 20-to-40-year obligation that must be matched by illiquid assets — infrastructure debt, direct lending, and real estate — whose yields above gilt rates are what make the actuarial reserving costs absorbable. That asset-origination capability is not a parallel activity but a prerequisite: without internally sourced illiquid assets qualifying under Solvency II's matching-adjustment rules, the capital relief that makes each transaction viable disappears, and underwriting capacity contracts. Solvency II then acts as the system's governing constraint, because each new liability transfer consumes regulatory capital that can only be rebuilt through mortality experience, realised investment spreads across multi-decade holding periods, or fresh capital issuance — none of which can be accelerated operationally. If regulators narrow matching-adjustment eligibility, the capital relief and the yield spread that justifies taking on longevity risk collapse together, removing the mechanism that connects asset origination to underwriting capacity in the first place.
How does this company make money?
Money flows in through four distinct mechanics: management charges on £1.1 trillion of assets under management; the spread between the investment yields generated by bulk annuity matching assets and the actuarial cost of the liabilities those assets back; mortality experience gains, which arise when pension scheme members die earlier than the actuarial assumptions used at the point of pricing; and origination charges on infrastructure debt transactions at the point of lending.
What makes this company hard to replace?
Bulk annuity transactions are irreversible: once a pension scheme's liabilities are transferred, the transaction cannot be unwound, and the obligation runs for 20 to 40 years. Infrastructure debt investments typically include bespoke covenant packages and relationship banking arrangements established at origination, creating switching costs for borrowers. Any new insurance competitor seeking to replicate the model must first obtain Solvency II regulatory approval, a process requiring multi-year lead times that cannot be shortened through capital or hiring alone.
What limits this company?
Solvency II capital ratio calculations impose a hard ceiling on how many bulk annuity transactions can be written, because each liability transfer consumes regulatory capital in proportion to longevity and investment risk. That capital cannot be replenished through operational efficiency alone — it can only be rebuilt through mortality experience emerging better than actuarial forecasts assumed, through investment spread realising over multi-decade holding periods, or through issuing fresh capital.
What does this company depend on?
The mechanism depends on five specific upstream inputs: the Solvency II regulatory framework, which sets the capital rules the entire structure is built around; a continuing supply of UK defined benefit pension schemes seeking to transfer their liabilities through bulk annuity transactions; internal infrastructure debt origination capabilities used to produce the long-duration assets required for liability matching; actuarial longevity modelling systems that quantify the uncertainty in pension member lifespans; and Bank of England regulatory approvals that permit the insurance operation to function.
Who depends on this company?
UK corporate pension scheme sponsors — the companies that once ran these pension schemes — would retain ongoing longevity and investment risk on their own balance sheets if bulk annuity transfers were unavailable. UK infrastructure projects depend on the platform as a source of long-term debt financing; without it, they would lose access to a patient capital provider willing to lend over 10 to 20 year horizons. Defined benefit pension scheme members face increased risk of scheme underfunding if the liability transfer mechanism were disrupted.
How does this company scale?
Investment processes and compliance infrastructure across the £1.1 trillion asset management platform spread over a larger asset base without proportional increases in cost, so that side of the operation scales efficiently. Bulk annuity underwriting cannot scale in the same way: it is capped by Solvency II capital constraints, and each transaction requires bespoke actuarial analysis of the specific member population of that individual pension scheme, a process that resists automation.
What external forces can significantly affect this company?
UK longevity trends directly affect the actuarial assumptions built into bulk annuity reserving — if members live longer than modelled, reserves must increase. Bank of England monetary policy influences gilt yields, which in turn determine the spread available between liability costs and the returns generated by matching assets. Changes to the Solvency II framework by UK regulators can alter the capital requirements that govern underwriting capacity.
Where is this company structurally vulnerable?
The capital efficiency of the model depends on self-originated illiquid assets receiving favourable treatment under Solvency II's matching-adjustment rules — a mechanism that allows insurers to unlock capital relief when assets closely match liability cash flows. Any regulatory change that restricts which assets qualify for matching-adjustment treatment, or that raises capital charges on those instruments, would simultaneously reduce underwriting capacity and eliminate the yield spread that makes the liability match economically viable, collapsing both sides of the mechanism at once.