There was a boost in volume of buy-in and buy-out activity in 2023, and this year will likely remain busy as bond yields having recovered and stabilized.
Legal & General has managed some of the UK's biggest pension buy-ins, including the £4.8 billion deal for Boots (the second largest in 2023), the £4.4 billion buy-in for British Airways in 2018 and the £4.6 billion deal for Rolls-Royce a year later. There were 11 deals in the year to the end of 2023 over £500 million (vs. 15 in 2022); the top five deals in 2023 were valued at £21.2 billion. The RSA and Boots deals were the largest ever buy-ins so far.
Kevin Ryan, Senior Industry Analyst (Insurance) at Bloomberg Intelligence, said: “It's clear that many companies view staff pensions as both a distraction and unwelcome liability, so we expect the trend to outsource the liability to continue.”
Under the IAS 19 rule, AA+ corporate bond yields are used to discount defined-benefit pension liabilities and are up sharply year-over-year, notes BI. Yields have risen steadily since July 2021 and though this year has seen some volatility, higher average yields are likely the new normal. The rise has outpaced the Covid-19 spike that drove yields sharply higher in March 2020. Rising interest rates, combined with geopolitical uncertainty, have driven the bounce.
Ryan added: “This is broadly good news for insurance companies with two sources of profit: underwriting and investment income. Many companies' defined-benefit plans should begin to appear better funded, making these more attractive to the buy-in, buy-out market. Still, challenges remain, with insurers uniquely qualified to manage them for pension-fund clients.”
Sizing Pension Liabilities at Aviva, L&G
The size of the deficit matters most for defined-benefit pension plans, but it's instructive to compare total pension liabilities with a company's market capitalization. Aviva's pension liabilities overshadow its market capitalization and may potentially be more of an issue than at either Legal & General or Phoenix. When FY 2023 figures are published, the situation will likely have further improved, notes BI.
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