• Around 35% of FTSE 350 DB schemes estimated to be fully funded on a buyout basis at 31 May 2024, representing liability values of around £175bn.
• This is over three times the bulk annuity business written in 2023 (£49bn).
• A further 20% of FTSE 350 DB schemes are expected to reach full funding on a buyout basis over the next three years, representing additional liability values of around £140bn.
While not all of these schemes will currently be in a position to transact (due to data and benefit issues, for example), this illustrates the potential scale of the demand for bulk annuity transactions over the coming years.
Evolving insurance market
The bulk annuity insurance market is growing; firstly due to existing participants expanding their new business aspirations; and secondly due to new entrants to the market with further new entrants waiting in the wings. That said, meeting the potential growth in demand will still represent a significant challenge given asset sourcing, human resource and other constraints. Schemes and sponsors may therefore need to be increasingly flexible over the form of tender process they follow, their timescales for completing a transaction and their asks of insurers.
The last 18 months has seen significant innovation in the risk transfer space for transactions of all sizes to help schemes access the market, and insurers be able to deal with heightened demand. Further innovation could help the market meet a further surge in demand.
Opportunity cost of buyout?
The reappearance of DB scheme surpluses has ignited a debate about the economic value held in UK DB schemes and how this should best be deployed. The traditional option for well-funded schemes has been to transfer the responsibility for benefit payments to an insurance company via a bulk annuity transaction, usually enhancing security for members and reducing risk for the sponsoring employer – but in return for a large premium payment.
While this will remain a popular option for the majority of the UK’s DB schemes, there is a growing recognition that a bulk annuity transaction results in an irreversible flow of the economic value from the scheme (and therefore members and the company) to the insurance company. DWP is currently consulting on reforms to enable sponsors and trustees to instead access, and share, this value over time.
BW’s analysis shows that in the scenario that all of the FTSE 350 DB schemes transferred to the insurance market at 31 May 2024, around £125bn of economic value would be passed over to insurance companies, being the difference between insurer pricing (which includes margins for capital requirements, expenses and profit) and the best-estimate cost of providing scheme benefits over the long term. If instead, this were shared over time between members and sponsors then it could be a boon for UK PLC, the taxman and workers alike.
Lewys Curteis, said: “The reversal in the fortunes of the UK’s DB schemes has had a seismic impact on the pension risk transfer market, and we are likely to see the demand for bulk annuity transactions stretching the resources of the insurers for some time (even with new entrants coming into the market). At the same time, we are seeing an increasing number of schemes assessing the potential benefits of pursuing a run-on strategy, with a view to releasing previously trapped economic value for the benefit of members and sponsoring companies. We would encourage companies and trustees to properly assess the benefits that could be obtained from a run-on strategy before making the irreversible decision to transfer to the insurance market. Given the potential for significant regulatory changes, schemes and their sponsors may wish to reappraise whether a plan to buy-out at the earliest opportunity remains optimal.”
BW advises on risk, pensions, investment, insurance, and employee benefit services. The consultancy acts as a trusted partner for a wide range of clients in both the private and public sectors – this includes 25% of FTSE 100 and over 15% of FTSE 350 companies.
BW is free from any external stakeholders, allowing it to take a long-term view with all clients and the freedom to bring fresh ideas to the table.
|
