Key findings from Hymans Robertson’s annual Risk Transfer Report which looks at developments in the bulk annuity market:
-
Demand from DB schemes to transact bulk annuity buy-ins will reach £350bn by 2026
-
This demand is likely to exceed capacity in the market by £125bn
-
Interest rate falls since Brexit have extended the time it will take DB schemes to reach self-sufficiency by at least 3 years on average
-
As the total UK DB deficit hits £1 trillion, the need for schemes to proactively chip away at the problem to reduce risks could not be greater
-
Over the next decade, DB schemes and insurers will look to buy over £300bn of additional gilts.
For the report, Hymans Robertson analysed all FTSE 350 sponsored DB pension schemes. It also assessed the appetite of each insurer operating in the bulk annuity market to transact.
James Mullins, Head of Buyout Solutions at Hymans Robertson, said: “These findings show that, over the medium term at least, demand from DB pension schemes to complete bulk annuity transactions is likely to exceed the capacity insurers active in this market are able to supply.
“To give a sense of the scale of the mismatch, if we were to assume a 5% increase in insurer capacity year-on-year, then in ten years that would equate to £225 billion of supply. That’s still £125 billion short of total demand. Even when taking a more optimistic year-on-year growth of 10% over the next ten years we’d still be looking at a £65 billion shortfall.”
Discussing what schemes should do, he added: “Scheme finances have been stretched over the past decade with the situation getting a lot worse post Brexit. In the past week we’ve seen an interest rate cut and the BoE’s Quantitative Easing programme hitting setbacks, sending bond yields spiralling down to record lows. This creates a vicious cycle whereby it increases the need for pension schemes to hold on to gilts. This has pushed the deficit figure for the whole of UK DB an eye-watering £1 trillion.
“Rather than sitting tight and waiting for financial conditions to improve, trustees and sponsoring employers need to take proactive steps to chip away at the problem and capture opportunities to reduce risk in stages. Buy-ins are a key to this.
“There are clear advantages in trying to reach self-sufficiency via a series of well-planned buy-ins, rather than waiting to do it all in one go via a buy-out. Not least that when we reach the point that demand to transact buy-ins outstrips supply from insurance companies, insurers will inevitably offer better pricing to the pension schemes that have already completed a buy-in.
“With the added uncertainty and volatility that has emerged from the decision to leave the EU, we predict this will accelerate scheme de-risking strategies, moving schemes further along the road to becoming more resilient to risk.”
|
