Buy-ins and buyouts: The quiet revolution

A quiet revolution has been playing out, of which many of those individuals will be unaware, providing increased security for member benefits. 

It is now a decade ago since a range of new insurers opened up the bulk annuity market and schemes began in earnest to insure their obligations through buy-ins and buyouts.

Since then we’ve seen UK company pension plans transfer £70bn of assets to insurers, equivalent to around 5 per cent of the £1,500bn of total defined benefit pension assets. I suspect it will take considerably less than another 10 years for this to reach 10 per cent of DB pension assets.

2017 set to be a bumper risk transfer year

Buy-ins have become an established risk management tool for even the largest schemes. For example, the Philips Pension Fund completed a £3.5bn buyout in 2015 through staged buy-ins, while the ICI Pension Fund has insured 75 per cent of its liabilities totalling more than £8bn, including £2.7bn across five buy-ins in 2016. 

Annual buy-in and buyout volumes peaked at £13.2bn in 2014, but I believe this record could be broken in 2017 with volumes exceeding £15bn for the first time. Activity has accelerated since the Brexit vote in June and is continuing into 2017 with a record pipeline of new transactions.

Fortunately, there is plenty of scope for the market to grow. I expect insurer capacity to increase to more than £20bn in 2017 – and therefore be able to comfortably meet demand of more than £15bn.

But, should this pace of growth continue over the next 10 years, it is less than clear that current favourable terms will continue to be available. 

Funding positions have recovered since the downturn immediately following the Brexit vote, and pensioner buy-in pricing is at its most favourable level since 2011 compared with holding gilts; schemes able to move quickly and nimbly can find good opportunities.

Charlie Finch is a partner at consultancy firm LCP