Aon Hewitt has said that UK pension schemes that are looking to move to buyout need to be prepared to compete for buyout opportunities and should also have a contingency plan in place.
The scale of interest in buyouts was flagged up clearly at a recent Aon Hewitt conference, when a survey of attendees indicated that 23 per cent of schemes currently expect to secure benefits with an insurer by 2020.
Paul McGlone, partner at Aon Hewitt said:
“Excluding the largest 200 or so schemes, there is well over £500bn of liability in small to medium size schemes. If 23 per cent of those schemes plan to be fully secured by 2020, that, on average, would require, £20 billion of placements to insurers for each of the next eight years. That is possible, although it would mean a big step-up from the current level of activity."
“However, past experience in the buyout market has shown that it is prone to surge in demand, as schemes look to move to buyout en masse when the time and circumstances are right. This generates bursts born out of pent-up demand, and this in the past has led to bottlenecks. As a result, not everyone who is interested will get their transaction finished.”
With this expectation of how the bulk annuity market may react, Aon Hewitt is recommending that schemes pursuing a buyout do so with as much preparation in advance as possible – which will ensure that the time taken to transact is minimised. Beyond this, schemes also need a well-considered and low risk back-up plan.
Paul McGlone said:
“It would be surprising if some schemes are not disappointed when they try to secure a buyout with an insurer. They will be competing for what may be limited opportunities in the market and not every scheme is going to be able to complete their buyout plan at the time that they want.
“It’s therefore imperative that schemes have a contingency plan so that they can run if needed for a number of years on a low-risk basis until the right opportunity emerges. This would mean keeping the scheme in a holding position until it can capture the opportunity to buyout when all the factors are right, but in which it doesn’t incur unnecessary investment risk or employer contributions. Key to this will be not only appropriate asset allocation but an efficient benefits delivery model that can ensure the scheme is ready to buyout when conditions change.”
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