A recent analysis from LCP has highlighted that the number of UK private sector defined benefit (DB) schemes fully funded on buy-out has expanded to 20%, equating to 1,000 schemes, and c£275 billion of assets out of the £1,400 billion total in UK DB schemes.
According to the firm, this has led to a “seismic shift” with a large rise in the number of schemes seeking to transfer to insurers.
A new report from the company shows that there was an increase of over 50% in the number of schemes approaching insurers for buy-in/out quotations compared to this time last year.
At the same time, LCP’s analysis projects that a further 1,250 schemes will reach full funding on buy-out within the next five years.
The firm noted that volumes of assets transferring to insurers over the next five years are even projected to reach up to £360 billion, which ultimately represents a major rise from historic levels, with volumes over the past five years totaling to £155 billion.
Moreover, early indications of the seismic shift can be seen in the record £21.2 billion of assets transferred to insurers in H123, setting up the year to remain on track to exceed the previous record of £43.8 billion of buy-ins/outs in 2019.
However, between the strong demand, LCP noted that insurers have been scaling up through extra people, improved technology, extended asset sourcing and streamlined internal processes.
While pricing has remained highly competitive at all size levels, evidence has also shown that insurers are becoming more selective, with a 20% reduction in the proportion of insurers that agree to provide a quotation.
Further, LCP’s report also analyzed how different market segments are performing.
Interestingly, very large schemes have witnessed the biggest growth, with the number of £1 billion plus transactions approaching insurers increasing by 2-3 times in the first half of the year.
Meanwhile, smaller transactions continue to be relatively well-served, with a number of insurers allocating dedicated capacity. However, despite a considerable increase in quotation requests, insurer participation rates have remained relatively stable over the past two years, states LCP.
Charlie Finch, Partner in LCP’s de-risking team, commented: “There has been a seismic shift in the DB pension landscape in the past year as the number of schemes seeking to transfer to insurers has surged on the back of tumbling buy-out shortfalls. The record for the largest scheme to achieve full insurance has been broken twice this year already – once by RSA at £6.5bn in February and then by the British Steel Pension Scheme at £7.5bn in May.
“Our analysis shows that this trend is only likely to accelerate with nearly half of the c5,000 DB schemes projected to be fully funded on buy-out within five years.”
Imogen Cothay, Partner in LCP’s de-risking team, added: “Insurers are rising to this challenge, and despite short-term resourcing pressures, insurers are confident about their capacity to support record-breaking demand over the coming years.
“As activity ramps up, insurers are being more selective on which schemes they work with, but we are still seeing strong competition, even for smaller transactions. That being said, schemes that wish to target insurance need to be strategic in their approach. The balance of power in the market has shifted, and schemes need to be able to justify to insurers through targeted preparation and by agreeing to a suitable route to market, why those insurers should participate in their transaction processes.”
