Demand for bulk annuity buy-ins is expected to quadruple over the next 15 years as £700 billion worth of defined benefit pension scheme liabilities are expected to be passed to insurers by 2032, according to a Hymans Robertson report.
Around one-third of current defined benefit (DB) pension risk schemes are expected to reach self-sufficiency over the next 15 years as UK firms increasingly look to offload this risk, the report found.
James Mullins, Head of risk transfer buy-out solutions at Hymans Robertson, said that challenges surrounding DB schemes’ long-term affordability and sustainability have been driving the push to offload risk.
“If demand for buy-ins quadruples, as we predict, this is a phenomenal increase. Pension schemes should be proactive and gradually chip away at the problem through a series of well-timed buy-ins, to take advantage of the high insurer appetite and optimal pricing we’re seeing in the market today,” he said.
This would open up large-scale demand for insurance and reinsurance capacity which will be needed to support much of the pension risk transfer activity, including the use of longevity reinsurance and longevity swaps.
Risk transfer of the scale predicted would see around £50 billion buy-ins and buy-outs a year by 2032 – a stark increase compared to the current annual transaction volumes of £10-15 billion.
Mullins said for the second half of 2017, transaction values should exceed £10 billion for the third year running, after just £5 billion worth of buy-in and buy-outs were completed in H1 so far.
“all the signs are pointing towards 2017 being another high-volume year. Despite this, some insurers have completed less bulk annuity business than they had targeted in the first half of 2017, which only serves to increase their appetite to transact over the remainder of the year.”
“A number of insurers haven’t met their bulk annuity targets for the first half of 2017 and so the willingness to complete buy-ins and buy-outs with pension schemes is currently high.
“This will not always be the case. As more and more schemes consider insuring their risk, insurers will be increasingly less able to keep up with demand. When this happens they will be more likely to give priority for their best pricing to pension schemes that have already completed a buy-in.
“This is because those pension schemes have demonstrated they have the knowledge, experience, governance and general readiness to carry out these transactions.
“So pension schemes who take proactive steps to chip away at the problem by capturing opportunities to complete a series of buy-ins will be in a strong position in years to come,” he explained.
