One third (32%) of Defined Benefit (DB) pension scheme trustees are now targeting a buyout with an insurer, with a further 5% aiming to run the scheme off over time with a buyout-like level of funding, according to re/insurance broker Willis Towers Watson (WTW).
It found that the remainder of DB schemes planned to do so with various levels of investment risk/reliance on the sponsor, and compared the figures to its 2013 report, when on 11% of schemes reported a buyout as their target.
WTW recently reported that 2018 is on course to be a record-breaking year for buy-in, buyout, and longevity swap transactions by DB pension funds, with more than £10 billion of transactions having already been completed at the end of June.
Shelly Beard, Senior Director of Transactions at WTW, commented: “Some schemes will be closer to buyout than they think. For example, because insurance pricing can be keener than the actuary’s solvency valuation, or because insurers’ life expectancy assumptions have softened since the last actuarial valuation. We have recently seen some of the most competitive buy-in and buyout pricing for a decade, particularly for pensioners.
“Alongside this, the growing demand from members for DB transfers can cut the cost to the employer of getting the remaining non-pensioner liabilities off its books. Finally, as more members retire and move to pensioner status, the buyout cost for them reduces.”
WTW noted that long-term journey planning remains the most common priority for both trustees and scheme sponsors, with 63% of trustees and 68% of pension managers listing it among their top three concerns.
It also reported that the number of schemes with long-term journey plans has remained steady over the past five years at around two thirds, while 22% are in the process of developing a plan as schemes mature and are closed to new benefit accrual.
“Over time, increased demand for securing liabilities will require an increase in supply. Perhaps the biggest question mark concerns the availability of long-term assets carrying an illiquidity premium,” continued Beard.
“Typically, these account for 30% to 40% of the investments a buy-in provider makes to back the pension commitments it takes on. If supply does not keep pace with demand, prices could worsen slightly. To get the best prices, schemes may have to be flexible as to when they transact, being at the front of the queue when a chosen insurer can source appropriate assets.”
WTW added that one of the key changes to result from the UK Government’s March 2018 White Paper was the requirement that every scheme be explicit about its long-term objective.
It also noted that the Pensions Regulator will describe the statutory funding targets that employers and trustees must usually agree on every three years as “staging posts or steps on a journey plan towards achieving the long-term objective.”
Graham McLean, Willis Towers Watson’s Head of Scheme Funding, stated: “Focusing on where the scheme ultimately wants to get to sounds like an obvious thing to do. In practice, some sponsors may be wary of locking in more demanding long-term targets if they fear this will limit their flexibility when it comes to agreeing contributions over the next few years.”
WTW also found in a recent report that, while a third of pension scheme trustees believe consolidating DB pensions into a pension ‘super fund’ would appeal to corporate sponsors, only a quarter would feel comfortable judging whether such a move would make sense.
