More than 1 million members of defined benefit (DB) pension schemes will have their pension benefits provided by insurance companies by 2017 as increasing numbers of companies and trustees de-risk their pension liabilities using insurance, according to the fifth annual LCP Pension Buy-ins, Buy-outs and Longevity Swaps report published today.
The report reveals that 2011's record levels of activity brought total market volumes to £40 billion since 2006, with £12.3 billion worth of business transacted over 2011 alone, a 50% year-on-year increase. This influx of new business to insurers means that over 500,000 DB members now benefit from the protections of an insurance policy - either through a buy-in policy held by the scheme trustees or a buy-out policy in the member's own name - with numbers increasing by about 100,000 a year.
And despite headline business volumes in 2011 reaching record new levels, LCP's report shows that the underlying demand from pension schemes to de-risk using insurance buy-ins or buy-outs is even higher than current volumes suggest. Should markets bounce back and pension deficits close then business volumes could accelerate rapidly.
Clive Wellsteed, partner at LCP, explains: "Pensions to members of DB pension schemes will be paid out over the next 50 years or more, but many schemes are de-risking over much shorter timescales - perhaps 10 or 15 years. Insurance is the natural exit route and is fundamental to most de-risking strategies.
"The challenge for finance directors is to balance the benefits of reduced risk and increased security from insuring historic DB pension obligations against the cost of doing so."
Charlie Finch, partner at LCP, explains: "The good news is that the first step in a strategy to de-risk using insurance is a "win-win" - this is where schemes purchase a buy-in from an insurer covering pensions in payment. Not only is current pricing very competitive, but the scheme and its members enjoy dual support from the insurer and their former employer."
Finch continues: "Stage 2 in the de-risking plan might be to insure new pensioners in five years' time, followed by the remaining members in year ten - once they are older and more affordable to insure. This provides time for the scheme's investments to bounce-back from recent lows and for the employer to pay steady cash contributions to the scheme. This makes a lot of sense from the finance director's point of view.
The arrival of the IORP directive - a Solvency-II type approach for funding occupational DB pensions - is also looming on the horizon, which could see higher funding targets and cash contributions for DB schemes in the UK. While the final outcome is far from certain, LCP's view is that this can only accelerate demand from pension schemes to de-risk.
Clive Wellsteed concludes: "As we ourselves get older, we want lower risk and volatility in our own financial affairs. The same is true here - as pension schemes reach their "autumn years", a clear strategy for reducing risk, including the use of insurance, will help the trustees, members and finance director to all sleep easy at night."
|
