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.”
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