A potential surge in demand for pension buyouts could create a bottleneck in deals that makes it imperative schemes develop a contingency plan, Aon Hewitt said today.
Almost a quarter (23%) of schemes surveyed by the human resources consultancy at a recent event said they currently expect to transfer their pension promise to an insurer by 2020.
According to Aon Hewitt, having this proportion of the £500bn-plus liabilities of the UK's small and medium pension schemes fully secured with an insurer would require £20bn of placements a year over the next eight years.
Paul McGlone, a partner at the consultancy, said that while that was possible, it would require a 'big step-up' from the current level of buyout activity.
Sponsors and trustees should also be aware that the buyout market is prone to surges in demand, as schemes look to complete risk transfer deals en masse when the time and circumstances are right.
'This generates bursts born out of pent-up demand, and this in the past has led to bottlenecks. As a result, not everyone who is interested will get their transaction finished,' McGlone explained.
It is therefore 'imperative', he said, that schemes have a contingency plan in place which allows them to run for a number of years on a low-risk basis until the right buyout opportunity appears.
'This would mean keeping the scheme in a holding position until it can capture the opportunity to buyout when all the factors are right, but in which it doesn't incur unnecessary investment risk or employer contributions,' he said. 'Key to this will be not only appropriate asset allocation but an efficient benefits delivery model that can ensure the scheme is ready to buyout when conditions change.'
Schemes should also prepare as much as possible before pursuing a buyout because this will reduce the time it takes for them to complete a deal, he added.
