17 April 2020
After analysing buy-in and buy-out activity and pipelines following an unprecedented month of COVID-19 related lockdowns and investment volatility, LCP predicts that total buy-in and buy-out volumes for 2020 by DB pension plans in the UK will hit £25bn, the second largest total on record.
This comes on the back of record-breaking transaction volumes for 2019. In 2019 there were £43.8bn of pension buy-ins and buy-outs (also known as bulk annuities) by UK pension schemes. This made 2019 the busiest year ever, ahead of 2018 (£24.2bn) and 2017 (£12.3bn) combined. Further details of 2019 volumes are set out in the notes.
LCP’s analysis for 2020 volumes is based on views from clients and insurers, pricing in the market and expectations of pipeline in the second half of the year.
Pricing from insurers has improved over March and early April relative to the value of gilts. This reflects the falling price of high-quality corporate bonds in which insurers invest. Insurers have been able to pass on some of the lower cost of investments to pension schemes through lower buy-in/out pricing, with the remaining cost benefit used to maintain robust financial reserves.
It is too early yet to draw firm conclusions on the impact that higher COVID-19 related mortality may have on insurer pricing and pension scheme finances. However, current projections for potential excess deaths in the UK suggest the impact will not be significant, with the bigger impact being swings in financial markets.
Charlie Finch, partner at LCP commented:
“Trustees in buy-in processes have responded to COVID-19 in three main ways, with a focus on balancing pricing, carrying out suitable due diligence and checking a transaction fits with any wider scheme constraints. “The most common approach has been a “proceed with caution” strategy, with trustees making sure that any pre-transaction due diligence covers the resilience of the insurers’ financial strength and day-to-day operations. A second group of trustees have accelerated processes to take advantage of pricing opportunities – some have been very attractive – and a third, smaller group has put transactions on hold, for example if their wider scheme’s funding level has fallen materially as a result of market volatility.”
“Putting all of this together, we forecast that £25bn is a realistic central estimate for 2020 volumes. Clearly there are uncertainties that remain as to how the year plays through but we are continuing to see a buoyant level of activity.”
Notes to editors
2019 Buy-in/ buy-out volumes in the UK (£bn):
Source: Insurance company data.
Note: Total columns and rows may not sum due to rounding
The chart below shows the volume of buy-ins and buy-outs since 2007 split by half year.
Buy-ins and buy-outs over £100m in 2019 (£m) and 2020 publicly disclosed to date
Source: Insurance company data for 2019 and public announcements.
Further details of previous years can be found in LCP’s De-risking Report 2019, “Buy-ins, buy-outs and longevity swaps”, available at www.lcp.uk.com/deriskingreport.