£80bn could be written in insurance transactions this year – while other DB schemes might consider running on. In the background, a general election is looming. What’s on the horizon for DB schemes in 2024?
Over the last few years, defined benefit (DB) pension schemes have had a reversal in fortunes. Far from the old days, where deficits weighed down trustees and scheme sponsors alike, today’s dilemma is how to prolong the good health of DB schemes. This topic is set to continue to dominate conversations in 2024.
A record year for insurance transactions
2024 will be a record year for de-risking transactions, with £80bn set to be written in bulk annuity transactions and longevity swaps, consultancy WTW has predicted in its annual pensions de-risking report.
Jenny Neale, director in WTW’s pensions transactions team, said: and, from a capacity perspective, we have already seen that the insurance market is capable of scaling up to meet demand.
“It’s clear that funding improvements have turbo-charged the pensions de-risking market"
Jenny Neale
“The attractiveness of these opportunities is also enticing new insurers to enter the market adding additional capacity, which we believe will be sufficient to meet requirements in the year to come.”
Keep on running
DB schemes are not just looking at de-risking transactions. “Funding improvements have opened up new avenues,” said Serkan Bektas, head of the client solutions group at Insight Investment.
Bektas added: “Running on is a very attractive alternative. As we look at the Mansion House speech and the follow up in the autumn statement, we have been engaging to explain there is a very attractive win/win solution available. Surpluses can be used to benefit scheme members and the economy overall.”
Matthew Arends, head of UK retirement policy at consultancy Aon, is observing the same trend. When DB surpluses were most recently a topic of conversation, in the 1990s, a lot of the discussion focused on who owns DB surpluses, he recalled.
Arends added: , to some extent, and we find ourselves coming back to the same questions again. But I think the context is rather different because the protections in place for DB schemes are so much stronger than they were in the 1990s. So I think we do have to take that into account when assessing the balance between the employer and the members, and sharing out [the surplus].”
“It seems to me that history is repeating itself"
Matthew Arends
Several of Aon’s clients are already using their DB schemes to fund their defined contribution (DC) scheme, reported Arends. “We have a number of clients doing it and it doesn’t require any changes to the law. Provided they are the DB section and the DC section within the same trust and your trustee rules permit it, we believe it's possible to use the DB surplus to fund DC contributions. That can be an efficient way for an employer to utilise its DB surplus.”
Mansion House
As Bektas alluded to, the government is encouraging pension schemes to invest in private markets. Will this drive affect DB schemes? Arends said: “Generally speaking, I think private sector DB is largely very mature now and taking risk out of the assets of the scheme, and therefore the possibility of further investment in private assets, is probably quite limited, for good reasons. Within public sector DB, that there seems to me more scope for considering those investments, simply because the time horizon for those schemes is that much longer, and they have significant asset pools to enable them to do that.”
A trustee crisis could be on the horizon
Nearly three quarters (73%) of trustees are planning to step down from their role within the next three years, raising wider questions about the stability of the pensions industry.
The research, which was conducted by Charles Stanley Fiduciary Management, signals that the industry could face an exodus of experienced pensions professionals – and highlights the importance of finding the next generation of trustees.
Bob Campion, senior portfolio manager at Charles Stanley Fiduciary Management commented: “Onerous reporting requirements have once again reared their ugly head in 2023 as a factor pushing trustees out, but the effect of impending retirements continues to be the biggest pressure.
“To avoid a sudden shortfall in professional oversight which would put people’s pensions and investments at risk, the industry needs to radically increase efforts to try to attract and retain the required influx of new talent.”
General election
Adding to the sense of an industry in flux is the fact that a general election is expected in 2024. “I think there will come a point in 2024 where the parties really stop thinking about policies, whether that’s pension policies or any other policies, and start to think about polling,” said Arends.
