LCP predicts up to £650 billion of buy-ins and buy-outs over the next decade and urges schemes to ‘grasp the nettle’

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In LCP’s report “Finding a Safe Landing” launched today, LCP predicts a wave of demand in the UK pensions de-risking market over the next decade, and urges schemes to ‘grasp the nettle’ and put in place practical strategic plans for reaching their end goal.  

The report highlights that fewer than 30% of UK DB pension schemes over £1bn have taken their first longevity de-risking step, so there remains considerable work for schemes to do given the majority expect to reach their long-term objective over the next decade.  

LCP’s analysis predicts up to £650bn of buy-ins and buy-outs over the next decade.  This reflects annual volumes of £30-50bn over the period to 2025 (or even higher if companies are willing to advance cash funding) with the potential for significantly higher volumes beyond 2025 as large schemes approach full funding on buy-out.    

This wave of demand is driven by continued improvements in funding and schemes steadily maturing, but LCP also believes there could be a further change of mindset from PLC boards towards de-risking; the new Pensions Act 2021 brings in a raft of new requirements including committing schemes to longer-term funding obligations and new climate reporting requirements for larger schemes. Schemes that are seeking to ultimately buy-out need to recognise that one of the biggest risks they face is insurers being increasingly selective over the next decade with consequences for the pricing and terms that can be obtained. LCP is urging schemes to reflect this dynamic in their strategic planning - to put in place a practical plan for reaching their long-term target and, if they have not already done so, to consider an initial buy-in to get their “foot in the door” and put them in a stronger position as the market gets busier.  

 Other findings in the report include:   

  • Pension schemes have seen a steady improvement in full buy-out funding, with funding levels rising from 59% to 72% funded over the past five years driving the surge in activity. This improvement has been caused by falls in projected life expectancies, good asset performance and competitive insurer pricing. 
  • Increasingly, large pension schemes are seeking to embark upon phased de-risking strategies through buy-ins and longevity swaps, as a way of reaching full buy-out gradually over time taking down risks along the way.  In 2020, only 1 in 4 transactions over £100m were full buy-out transactions for schemes which hadn’t previously completed a buy-in or longevity swap.   
  • Smaller schemes are facing challenges obtaining insurer engagement to provide competitive pricing and terms, with the share of the market relating to sub £100m transactions reducing from over 85% to 55% in 5 years. In terms of getting transaction ready, the eight insurers in the market felt the most important requirements were to communicate the scheme’s journey plan, be clear on timescales and have a complete, easy-to-follow benefit specification. 

Charlie Finch, Partner in LCP and co-author of the report, commented: “Our analysis shows that on current trajectories the de-risking market is set to continue to be very busy, and to pick up significantly over coming years.  The increasing legislative burden such as the new criminal sanctions in the Pensions Act 2021 could usher in a further change in mindsets as large schemes and their sponsors re-evaluate their long-term destination leading to a step change in market activity. 

Now is the time for pension schemes to grasp the nettle and put in place a clear, actionable plan for achieving their long-term objective, whether that be buy-out, self-sufficiency or a DB superfund.”  

Imogen Cothay, Partner in LCP and co-author of the report, added: “Regardless of a scheme’s end-goal, all should be considering the merits of progressively removing risk over time (through phased buy-ins, longevity swaps or alternative de-risking options) as part of their long-term strategy. Like with any investment, phasing over time can help smooth pricing fluctuations and reduce the risk to the end goal.”