On the go: For the first time ever, nearly one third of a trillion pounds will be paid by UK private sector defined benefit pension schemes over a three-year period, from 2019–2021 according to Mercer.
This is due to the combined impact of premiums for annuity buy-ins and buyouts, individual member transfers, pensions and retirement lump sums paid.
The consultancy also forecasts that annuity transactions and individual member transfers will hit a new record in 2019 of at least £50bn.
Large numbers of active and deferred members are expected to transfer out of their schemes, and it is anticipated that unprecedented premium volumes will be paid to insurers in the rapidly growing buy-in and buyout market.
Andrew Ward, partner at Mercer, said: “A third of a trillion pounds is a huge sum of money and shows how the UK’s DB pension landscape is changing rapidly. In aggregate, UK company DB schemes are expected to be better funded and bear less risk in three years’ time. There are headwinds, not least the potential for Brexit to disrupt the landscape, but the direction of travel is clear.”
He added: “There is potential for an emerging DB consolidator market. How this will impact the amount paid by DB schemes depends on how the new offerings are received by scheme sponsors and trustees. The recent consultation announced by the Department for Work and Pensions and the Pensions Regulator’s guidance will propel discussion in this area.”
Record year for buyins and buy-outs
2018 has been a record year for premiums paid to insurers for buy-ins and buyouts, with more than £20bn of DB obligations being insured.
Many transactions in this market are strictly scheme investments rather than payments out of the scheme; but they tend to be irreversible in nature and so are included in the overall amount paid by schemes.
David Ellis, partner at Mercer, said better-funded and increasingly mature pension funds have taken advantage of excellent pricing from insurers in 2018.
“Mercer expects the buy-in and buyout market to smash the record again in 2019 as well-organised schemes take advantage of attractive pricing from insurers. Overall, Mercer forecasts DB schemes will pay around £90bn in premiums to insurers over the next three years,” he added.
DB to DC transfers
The volume of transfer values taken by individual members has increased significantly in recent years.
For many years, transfer values paid each year by DB schemes in the private sector averaged around £3bn; whereas statistics covering the first three quarters of 2018 suggest that aggregate transfer values of around £20bn will be paid in 2018 overall. Mercer forecasts this trend to continue, with broadly £60bn of transfer values being paid over the next three years.
