On the go: Demand for buy-ins and buyouts is predicted to average £37bn a year for the next decade, according to new analysis.
Hymans Robertson’s projections would see half of all defined benefit schemes transfer their entire liabilities to bulk annuity providers, known as a full buyout, in the next 20 years.
Competitive pricing, increased concerns about sponsor strength, and a lower tolerance for risk in DB pensions have all led trustees and employers to consider bulk annuities.
The growth of this insurance sector was consolidated, with transactions totalling in excess of £40bn last year, powered by large multibillion-pound deals.
Hymans predicted that these large transfers would continue to feature heavily, accounting for two-thirds of volumes over the next decade.
Demand has the potential to spike further if recently observed market trends continue. For example, if widening credit spreads or other factors improve pricing by 0.2 per cent each year, then the total annual volume could reach £54bn.
Insurance regulation means annuity contracts written for pension schemes must be mostly backed by matching corporate bonds, so rising yields and falling asset prices mean deals can be sourced more cost-efficiently.
If the yields available on long-dated gilts, which are used to discount DB liabilities, rise by 1 per cent a year, the resulting improvement in funding levels would see demand rise to £63bn.
While the widening of credit spreads is already being observed and creating opportunities, other factors, such as the sheer difficulty of sourcing enough corporate credit issuance to offset all the UK’s promises to DB pensioners, could limit or reverse the trend in pricing.
James Mullins, head of risk transfer at Hymans Robertson, said: “This year may offer a short-lived buyers’ market for pension schemes able to move quickly and take advantage of pricing opportunities caused by recent market volatility.
“Over the longer term, we expect the market to return to more limited transaction capacity, relative to demand from pension schemes, meaning it is vital that pension schemes are well prepared before approaching insurers if they want to get on the front foot.
“Pension schemes will need to have to have a clear broking strategy, and a good understanding of how insurance companies think and operate, to stand out from the crowd and become more attractive to insurers. Smaller pension schemes will need to work harder to demonstrate why they are an attractive case to the insurers,” he added.
