Almost half of defined benefit (DB) pension schemes in the UK are now targeting a buyout as their long-term objective, up from just 15% four years ago, a survey of 100 trustees has found.
The polling by Hymans Robertson also found that the proportion of DB schemes aiming for self-sufficiency as their long-term objective has fallen from 81% to 37% over the last four years.
The remaining 14% of pension schemes are now targeting a form of consolidation as their long-term objective.
James Mullins, head of risk transfer at Hymans Robertson, said that he expects the total number of buyouts and buy-ins in 2020 to increase from the 153 transactions seen last year.
“However, the lower number of multi-billion pound buy-in transactions this year means that we expect the average transaction size to be lower than the £286m we saw in 2019,” He continued.
“The total transaction value in 2020 for buy-ins and buy-outs is likely to be around £30bn, which is around two-thirds of the 2019 total of £43.8bn.”
The growth in demand from pension schemes to insure risk is captured in a report published today by Hymans Robertson. which summarises all of the activity in the UK market for buy-ins, buyouts and longevity swaps, both over the last year and since this market took off in 2007.
It shows that £25bn of pension scheme risk was insured in the first six months of 2020, and that 40% of FTSE 100 companies that sponsor DB pension schemes have now completed buy-ins, buyouts or longevity swaps.
Mullins said that transaction values for buy-ins and buyouts are likely to average £37bn a year over the next decade due to a combination of factors, such as funding requirements meaning that sponsoring employers will need to fund pension schemes to a higher level, and the cost of insuring deferred member liabilities having reduced materially in recent years.
“These points mean that the additional money a pension scheme needs to get to buyout is less than it has been in the past,” he said. “This gap will reduce further as pension schemes mature, as more contributions are paid in and as investment risk is reduced further.
“The UK pension scheme risk transfer market is leading the world in terms of volume, maturity and innovation, with around £0.25trn of pension scheme longevity risk having been insured via buy-ins, buyouts and longevity swaps since 2007.
“Interestingly, half of the value of these pension scheme insurance transactions (£0.125trn) has taken place in just the last four years alone. This is a clear illustration of the strength of the further growth potential in this market.”
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Author: Chris Seekings