More than half of FTSE350 defined benefit (DB) pension schemes are expected to be fully funded in the next three years, according to analysis from Barnett Waddingham.
The consultancy analysed the performance of FTSE350 DB pension schemes over the last 12 months and said that around 35% of schemes are estimated to be fully funded on a buyout basis at 31 May 2024, representing liability values of around £175bn.
This is over three times the bulk annuity business written in 2023 when transactions reached £49bn. It is expected that this year could see volumes reach as much as £60bn.
Another 20% of schemes are expected to reach full funding on a buyout basis over the next three years, representing additional liability values of around £140bn.
This, according to Barnett Waddingham, illustrates the potential scale of the demand for bulk annuity transactions over the coming years.
It pointed out that the bulk annuity insurance market is growing; firstly due to existing participants expanding their new business aspirations; and secondly due to new entrants to the market with further new entrants waiting in the wings.
In response to this growing demand, three insurers announced their intention to enter the bulk annuity market in the last 12 months, these include Brookfield, Royal London and Utmost, bringing the market to 11 participants.
However, Barnett Waddingham said that meeting the potential growth in demand will still represent a significant challenge given asset sourcing, human resources and other constraints. It said that schemes and sponsors may therefore need to be increasingly flexible over the form of tender process they follow, their timescales for completing a transaction and their asks of insurers.
It added that more innovation could help the market meet a further surge in demand.
Economic value
Barnett Waddingham highlighted that the reappearance of DB scheme surpluses has ignited a debate about the economic value held in UK DB schemes and how this should best be deployed.
It said that the traditional option for well-funded schemes has been to transfer the responsibility for benefit payments to an insurance company via a bulk annuity transaction, usually enhancing security for members and reducing risk for the sponsoring employer – but in return for a large premium payment.
While this will remain a popular option for the majority of the UK’s DB schemes, there is a growing recognition that a bulk annuity transaction results in an irreversible flow of the economic value from the scheme to the insurance company. DWP is currently consulting on reforms to enable sponsors and trustees to instead access, and share, this value over time.
BW’s analysis showed that in the scenario that all of the FTSE 350 DB schemes transferred to the insurance market at 31 May 2024, around £125bn of economic value would be passed over to insurance companies, being the difference between insurer pricing and the best-estimate cost of providing scheme benefits over the long term.
Barnett Waddingham said that if instead, this were shared over time between members and sponsors then it could be a boon for UK PLC, the taxman and workers alike.
Lewys Curteis, principal and corporate actuary at Barnett Waddingham said: “The reversal in the fortunes of the UK’s DB schemes has had a seismic impact on the pension risk transfer market, and we are likely to see the demand for bulk annuity transactions stretching the resources of the insurers for some time (even with new entrants coming into the market).
“At the same time, we are seeing an increasing number of schemes assessing the potential benefits of pursuing a run-on strategy, with a view to releasing previously trapped economic value for the benefit of members and sponsoring companies.”
Curteis said that companies and trustees should properly assess the benefits that could be obtained from a run-on strategy before making the irreversible decision to transfer to the insurance market.
He added that given the potential for significant regulatory changes, schemes and their sponsors may wish to reappraise whether a plan to buy-out at the earliest opportunity remains optimal.
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