The rate of defined benefit pension liabilities being transferred off company balance sheets to the insurance market is set to double, according to PwC, as new technology means that pension schemes can get initial pricing for potential buyout/buy-in deals in days rather than weeks.
PwC has reached agreement with the majority of insurers operating in the buyout market, for them to provide initial prices for the cost of insuring defined benefit pension obligations, using Skyval, the pensions valuations and analytics platform.
Skyval Insure will allow companies and trustees to test the value of potential buyout/buy-in deals quickly and cheaply, informed directly by a panel of insurers. This means that more buyout requests are likely to convert into deals as pension scheme trustees and companies will have comfort in the affordability of the transaction. Insurers will also be able to focus their valuable resources on deals that are more likely to proceed. Other approaches rely on approximate or indirect information, which can lead to missed deals or misdirected effort.
Currently, as few as one in three formal buyout quotation requests from pension schemes lead to a transaction, due to dysfunctions in the process.
Raj Mody, head of PwC pensions consulting team and Skyval, said:
“UK private sector pension liabilities are causing a near £2 trillion pound strain for companies’ balance sheets. Many trustees and sponsors of defined benefit pension schemes understandably want to create more certainty for their pension members, by transferring these obligations to the insurance market. But often the process is too expensive, slow and uncertain. Skyval Insure is radically changing how this market operates and will strip out wasted time, energy and cash. Pricing visibility means that companies can allocate capital to de-risk with confidence, trustees can have much more clarity and control in that process, and members end up with a good outcome.
“We have the majority of insurers active in the buyout market signed up to use the system on live deals. Feedback is that this is exactly what this critical market needs to be able to move towards the next phase of its development. This is also a real opportunity for life insurers to fill the potential gap created by the changes happening in the retail annuities market, by transacting more buyout deals for defined benefit pension schemes.”
The new service, Skyval Insure, is designed to provide the most accurate pricing tracker available in the pensions buyout market for corporates and trustees. Other tools are typically based on indirect assessments of pricing, which inevitably suffers from approximations and becoming out-of-date.
PwC analysis shows that £50bn of defined benefit pension liabilities has been insured by pension schemes since 2006, with £7.5bn worth insured in 2013, as companies and trustees have sought to remove the pension risk from their balance sheets. But this is only a fraction of the near £2 trillion worth of liabilities which remain on UK balance sheets.
Jerome Melcer, pensions buyout adviser at PwC and head of Skyval development, said:
“Too many perfectly viable deals never get to market as trustees are relying on overly prudent estimates of the buyout cost. In deals we have completed recently, we have struck pricing terms significantly lower than the cost trustees or sponsors were expecting from other sources. We expect deal closure rates will improve sharply as pension schemes rely on Skyval to make more informed decisions on whether, when and how to proceed to later stages of execution.”
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