David Hamilton, Chief Actuary at independent consultancy Broadstone, said insurer capacity rather than funding position is likely to now be the biggest hurdle preventing many of these smaller schemes from reaching their endgame.
“A huge number of smaller schemes are now in a position where buy-out is a viable conversation. The figures from tPR only take us to March and we know from our own client base that a significant number of schemes have seen major funding improvements over the past six months as a result of increased gilt yields, with less well hedged schemes being the biggest winners.
“However, whilst tPR’s figures show that almost 80% of the fully funded schemes at 31 March have fewer than 1,000 members, that still leaves 500 larger schemes that were fully funded in March, and potentially more now. Given the limited capacity for transactions in the market, with the time involved in a deal not being proportionate to its size, larger cases are likely to dominate the attention of most insurers.
“Given the number of smaller schemes likely to now reach buy-out funding over the next few years, only the very best-presented cases in the smaller part of the market are likely to get competitive traction until insurers have significantly more resource. Our specialist team already emphasise that preparatory work and having an established process that can deliver an effective and efficient transaction process are critical to making schemes as attractive as possible to insurers. This is likely to become truer than ever as, in a sellers’ market, insurers will inevitably be looking more favourably at potential ‘easy wins’.
“Obviously data quality is a key part of this and with Pensions Dashboards also coming down the line, schemes have an opportunity to kill two birds with one stone when ensuring their data is complete, up to date and fit for purpose.”
Kunal Sood, Managing Director of Defined Benefit Solutions and Reinsurance at Standard Life: “These latest figures indicate the strong financial position and positive outlook for a large number of defined benefit pension schemes, with deficits largely in decline when compared to last year’s figures. Indeed, schemes closed to accrual and in a funding surplus account for almost £400bn of schemes in TPR’s data set by size of assets.
“Following the significant rise in yields and market volatility in the second half of the year, we would expect even more schemes to now be in a funding surplus. We anticipate this will lead to many schemes pursuing de-risking transactions on an accelerated timeframe as trustees aim to secure the opportunity afforded by a material improvement in funding levels.
“While scheme liability sizes have continued to fall with rising interest rates, there is still a significant opportunity for the pension risk transfer market, estimated to be worth c.£1.4tn in liabilities, with c.10% of that currently insured. We expect demand will continue well into 2023 and beyond, with most schemes continuing to target insurance as the gold standard end-game strategy.”
Simon Taylor, Partner at Barnett Waddingham, comments: “TPR’s new report on the UK landscape for defined benefit (DB) schemes shows a continued increase in the number of closed schemes, prompting more sponsors to think about the ultimate endgame to get schemes off their books. Funding levels looks stable, but it must be said that the data ends in March, before what was a volatile year in the global economy, and the UK gilt market especially.
“Our latest End Gauge index gives an average time for FTSE 350 schemes to reach buyout funding as just under 6 years, as of end of November. A recent fall in long-term inflation expectations meant liability values have decreased, and this more than offsets the impact of the slight hit to bond yields this month.
“Moving into 2023, companies with DB schemes should be working with their trustees to agree a journey plan that takes the needs of all stakeholders (members, employees, shareholders etc) into account, so that the scheme and the sponsor can safely negotiate the economic uncertain times ahead. A good liability and investment strategy would mean FTSE companies no longer need to worry about DB schemes come 2030."
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