It is the most affordable time in nine years for UK defined benefit (DB) pension funds to transfer liabilities to an insurance company, according to a new report from consultancy LCP.

It said it expected a 50% increase in volumes of UK pension liabilities being insured in 2018 as pension schemes take steps to reduce risk. 

Annual volumes of liability risk transfer deals, such as buy-outs, are set to increase to more than £15bn (€16.8bn), the firm forecasts.

Deals were becoming more affordable, partly because of stalling life expectancy improvements. 

Charlie Finch, partner at LCP and author of the new report, said: “Improving affordability is down to three primary factors: buoyant investment markets; insurers improving their ability to source attractive long-dated assets that are effective under the new Solvency II regime; and a convergence in views that pensioner life expectancies are reducing, on the back of several years of heavier-than-expected mortality rates.”

According to the Office for National Statistics, the number of deaths in England and Wales has increased each year since 2011 — with the exception of 2014 and 2016.

LCP said one in five FTSE100 UK DB pension schemes were now estimated to be over 80% funded relative to the cost of buy-out with an insurer — compared to one in eight a year ago.

The firm said its analysis showed that average buy-out funding had increased by almost 10% since August 2016 following the EU referendum, to reach the highest level since the banking crisis in 2008.

Separately, in its latest pension scheme funding update, JLT Employee Benefits revealed that the deficits of all UK private sector defined benefit pension schemes had shrunk to £150bn at the end of December 2017 from £187bn 12 months before.

Funding levels had increased to 92% from 89% over the same period, the data showed.

Charles Cowling, director at the consultancy, said there were signs that the pension buy-out market was taking off, with competition between insurers hotting up and prices getting keener.

“With over £12bn of deals transacted in 2017, all the signs point to an even stronger year in 2018, where it is possible that up to £30bn of deals could be transacted,” he said.  

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