• 50% of pension schemes set to reach buy-out in the next 20 years

COVID-19 is unlikely to dampen pension scheme enthusiasm for buy-ins and buy-outs over the next decade with demand set to average £37bn a year according to new analysis from Hymans Robertson, which also calculated that around 50% of pension schemes will reach buy-out over the next 20 years.

The leading pensions and benefits consultancy also found that two-thirds of buy-in and buy-out volumes over the next ten years will likely be driven by ‘mega-transactions’ of more than £1bn each. This could make it harder for smaller pension schemes to achieve the engagement necessary with insurers for many years to come.

A series of projections created by the consultancy show how changes, such as improved pricing or market conditions, could have a big impact on buy-in and buy-out demand. 

James Mullins, head of risk transfer at Hymans Robertson looks at the next ten years for buy-ins and buy-outs:

“The last decade saw the market for pension scheme buy-ins and buy-outs truly come of age as it grew from relative infancy to the impressive £40bn+ of premiums we saw written in 2019. An eight-fold increase compared to 2010. Whilst 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 a ‘new normal’ rather than a one-off spike. When we look over the medium term it seems likely that the market will continue to grow as before.

“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. 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.”

What happens if buy-in and buy-out pricing improves:

If pricing improves such that the implied return achieved from entering into a buy-in increases by 0.2% p.a. then we would expect to see demand shoot up by around 45% to hit £54bn a year on average for the next decade. With a 44% increase in the number of pension schemes expected to reach full buy-out.

James Mullins explains the potential impact of improved buy-in and buy-out pricing:

“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.  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.

“However hard questions would need to be asked about whether the buy-in and buy-out market, in its current form, has the capacity to compute the increased volumes expected in this scenario.”

What happens if market conditions improve:

If we were to see long term interest rates improve by 1% p.a. we could see average demand for buy-ins and buy-outs shoot up to around £63bn a year for the next decade. A move of this size would bring full buy-out within reach for 64% of pensions schemes with 6 in 7 pension schemes expected to transact on some form of buy-in or buy-out.

James also comments on how other topical issues affect this area:

“Market volatility and uncertainty caused by the recent COVID-19 outbreak 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 DB schemes and that we are set for a bumper decade for risk transfer activity.”

“The increased pressure on pension schemes by The Pensions Regulator to formulate long term objectives offers a good opportunity for pension schemes to review their strategic journey plans. We believe this will increase the number of pension schemes who are actively targeting buy-out and the number who end up being funded to a level whereby buy-out is within touching distance. Considering the best approach to market should form an integral part of any such strategy review.”