Will there be
a bottleneck as DB schemes rush for the exit via insurance?

Our viewpoint

I have recently returned to work from maternity leave to what can only be described as a maelstrom of activity in the pensions industry.  There has been a lot of focus on supporting Liability Driven Investment (LDI) arrangements following the government’s “mini” budget on 23 September. But one less publicised development is the dramatic increase in the buy-out funding levels for many schemes. In fact, analysis from our latest report on the future of the buy-in and buy-out market shows that nearly half of all schemes are now over 90% funded on buy-out. 

With many schemes closer to buy-out than ever before we are expecting a big uptick in de-risking activity. We project that we could see demand for buy-ins and buy-outs surge to as much as £200bn over the next three years. This compares to about c£30bn of buy-ins /outs expected in 2022. 

This leads me to ask:

Will there be a bottleneck as schemes rush to approach the insurance market for buy-in and buy-out quotations?

We think this is very likely.

Insurers are open and keen for new business. In fact, insurers will have to do nearly double the number of transactions to just stand still and stop their businesses from shrinking. This is because yield rises have reduced liabilities by around 40% but target business volumes are set in the £bns. Insurers have weathered the recent market volatility well because they have limited exposure to LDI, but even to meet existing targets they are going to have to work much harder.

The stumbling block for this: operational capacity. Insurers tell us that operational capacity is the biggest constraint to quoting on more transactions.

Insurers are already very busy and are increasingly more selective in deciding which schemes to prioritise. Whilst insurers are building their teams to meet the expected higher levels of demand, this will take time and is not a problem that is going to be solved quickly.

Many third-party administrators are also under immense pressure – as well as the long list of ongoing administrative tasks, many schemes have significant data projects to complete, GMP equalisation to implement and getting data in a form suitable to supply to pensions dashboards.  This is even before the extra resourcing demand from a big uptick in buy-in/out activity. Such transactions require considerable input from the administrators in the preparatory phases and post transaction implementation. This is particularly the case for full scheme transactions, which now make up the majority of transactions thanks to improving funding positions.

It would also be remiss of me to not mention trustees, sponsors and advisers who I know are also busy and working hard to manage the increasing demands that are currently facing UK pension schemes.

Therefore, it seems a real possibility there will be a bottleneck, even if it is only a short to medium term issue. 

But what can pension schemes do about it?

If you have a scheme that is now over 90% funded on buy-out, I recommend speaking to your strategic de-risking adviser to make a clear action plan to allow you to take advantage of your scheme’s current funding level. Your action plan should include tasks such as:

  • interrogating your buy-out position more closely;
  • agreeing a de-risking plan that works for both the trustees and sponsor, including whether that should incorporate one (or more) partial buy-ins ahead of reaching full insurance;
  • progressing preparation work for a transaction – eg drafting an accurate benefit specification and addressing gaps in data;
  • ensuring suitable resource is available at your administrators and advisers; and
  • considering how you would manage any surplus that may arise.

For most schemes, a good rule of thumb is that detailed preparatory work needs to begin at least 6 months, ideally 12 months, before you seek pricing from insurers.

Good preparation is one of the most important factors that insurers consider when deciding whether to participate in a process – the diagram, on page 8 of our report helpfully demonstrates this. Most of the preparation work is required regardless of when it is completed (ie it isn’t a “sunken” cost). So, in my view, there is little downside in getting underway now regardless of how far you think your scheme is from insurance.

Once you have completed the preparation work, your scheme will be ready to approach the insurers for quotations. Being able to move quickly is key and can be a huge advantage over other schemes. Often pricing opportunities arise quickly, even in a busy marketplace. If you have done the necessary preparation then you will have the best chance of taking advantage of such opportunities (and may even mean you are able to sidestep resource bottlenecks to lock in competitive pricing ahead of time!).