This year is set to be a record-breaking one for the pension de-risking market after the “rollercoaster” of 2022, according to Lane Clark & Peacock LLP (LCP).
The pensions, investment and insurance consultancy firm has shared five predictions for the market in the year ahead, which include record volumes of buy-ins and buy-outs, attractive pricing and continued innovation, although pension schemes may need to work “doubly hard” to prepare amid the increased demand, according to the consultancy firm.
It has predicted that this year’s buy-in and buy-out volumes will break the £44m record set in 2019, with high demand for buy-ins and buyouts following an average around 15% improvement in the buy-out funding positions of defined benefit (DB) schemes over 2022.
Charlie Finch, Partner in LCP’s de-risking practice, commented: “2022 was a roller-coaster year but the average DB pension scheme starts 2023 in much better shape than a year ago.
“The record improvement in average buy-out funding levels is likely to lead to record de-risking activity in 2023 surpassing the £43.8bn of buy-ins and buy-outs in 2019. Alongside more transaction volumes, we expect to see a further increase in the number of large schemes using buy-ins and buy-outs rather than self-sufficiency.”
LCP also suggested that pricing will continue to be attractive for schemes that are properly prepared as it has been improving significantly over 2022.
However, it warned that schemes will have to work much harder than in the past to secure active insurer participation.
Catherine Hopper, Partner in LCP’s de-risking practice, said: “The good news brings with it a fresh challenge of deciding when, if and how to approach insurers, particularly as many DB pension schemes had not planned to be in a position to buy-in so soon.
“Schemes wishing to transact will need to ensure they have done their homework properly ahead of approaching the market and have prepared in an optimal way. This will be a key factor when insurers choose which transaction opportunities to prioritise with their best pricing and terms.”
At the same time, despite the overall increase in buy-in and buyout volumes, LCP also predicted fewer partial buy-ins in 2023, with more full buy-ins and longevity swaps expected instead.
The firm stated that schemes are now operating with higher collateral levels post the “liability-driven investment (LDI) crisis” to improve resilience to future gilt yield rises.
Meaning that there is less capacity to undertake partial buy-ins at an early stage in a scheme’s journey.
For larger schemes, LCP added, this may tilt the balance from using buy-ins to using longevity swaps to hedge longevity risk. Care needs to be taken as longevity swaps themselves typically require collateral, the firm noted
LCP also predicts that new innovation will emerge to help address the illiquid asset challenges for schemes, an “increasingly common barrier” to full insurance that has been “exacerbated” by the LDI crisis.
These could include the development of a better ability to transfer illiquids to insurers alongside innovative deferred premium structures and other disposal options that better preserve value.
For its final prediction, LCP stated that 2023 has the highest chance for a new entrant entering the buy-in/buyout market for some years, given changing supply and demand dynamics in the market.
The firm expects that it is most likely to be an existing insurer because of the high barriers to entry. It highlighted that, even for an existing insurer there will be a considerable lead-in time as they recruit and develop capabilities.
Charlie Finch, concluded: “Insurers have shown a remarkable ability to innovate and develop new solutions. This will be important as we enter a new phase of the market over 2023.”
