Half of schemes set to reach buyout by 2040; Demand to average £37bn annually over decade

In analysis released today (23 April) the consultant said demand is set to average £37bn per year over the next decade.

It said around two-thirds of buy-ins and buyouts in that time period are likely to be driven by ‘mega-transactions' of more than £1bn and see 50% of schemes reach full buy-out in the next 20 years.

This echoes recent research from Lane Clark & Peacock which found an expected transaction figure of £25bn in the bulk annuity market this year would mean the second-largest year on record following 2019's £44bn in total volumes.

Hymans Robertson head of risk transfer James Mullins said the eight-fold increase in transactions compared with 2010 is just the start.

"The last decade saw the market for pension scheme buy-ins and buyouts truly come of age as it grew from relative infancy to the impressive premiums we saw written in 2019," he said.

"While the Covid-19 pandemic may impact demand in the short term, our analysis shows that we should begin to treat the significant volumes seen last year as the new normal, rather than a one-off spike. 2020 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."

If market conditions improve - supported by a boost in long term interest rates by 1% per annum - average demand for buy-ins and buyouts could soar to as much as £63bn over the next decade, the research found.

A move of that size would bring close to two-thirds (64%) of schemes within full buy-out.

Mullins said: "Market volatility and uncertainty caused by Covid-19 has the potential to temper buy-in and buy-out demand in the short term, however, over the medium to long-term our analysis suggests there looks to be no wavering of appetite from defined benefit schemes and that we are set for a bumper decade for risk transfer activity."

Demand could also be boosted if buy-in and buyout pricing also improves such that the implied return achieved from entering a buy-in increases by 0.2% per annum.

Hymans Robertson estimated this could be by as much as 45% to hit £54bn a year on average between 2020 and 2030 with a 44% increase in the number of pension schemes expected to reach full buyout.

"We have seen material pricing improvements for buy-ins and buy-outs from some insurers since mid-February 2020, as a result of the fall in prices of corporate bonds, into which insurers invest some of the buy-in premiums," said Mullins. "If insurers are able to continue to replicate this exceptional pricing, a buy-in or buy-out will come into reach of less well funded pension schemes, naturally increasing demand to complete these transactions."

Mullins concluded: "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."

 

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• Topics
• Defined Benefit
• Lane Clark & Peacock
• Hymans Robertson
• James Mullins