Insurance companies, pension funds, and trusts withdrew a net £40bn (€46bn) from “longer-term financial instruments” in 2016, according to the Office for National Statistics (ONS).

It was the first time the ONS had recorded a net disinvestment by this group of investors.

The same investor set withdrew £18bn in aggregate in the fourth quarter of 2016, the second consecutive quarter of net disinvestment. In January, JP Morgan Asset Management’s Sorca Kelly-Scholte suggested the disinvestment data could be an indicator of pension funds becoming cash flow negative as they mature.

A net £45bn was withdrawn from overseas securities, the ONS added, the largest figure since the dataset began in 1986.

In addition, the ONS reported that pension funds alone invested a net £31bn  in UK government bonds in 2016, the highest annual figure on record. Although a provisional estimate, the ONS said the figure was the highest it had recorded since it started collecting the data in 1963.

Pension funds withdrew a net £9bn in the fourth quarter, the largest disinvestment total since the fourth quarter of 2008, when £18bn was taken out.

The ONS has also reported a surge in consumer price inflation in the UK, to 2.3%. Its forecast is for inflation to hit 2.8% by the end of the year. The retail prices index measure of inflation hit 3.2%.

Meanwhile, the combined shortfall across the UK’s local government pension scheme (LGPS) fell by more than a quarter between 2013 and 2016, according to estimates from KPMG.

The aggregate deficit for the LGPS’ 89 funds in England and Wales fell from £47bn, according to the 2013 actuarial valuations, to roughly £35bn based on the 2016 actuarial valuations.

In a press release, KPMG said it had anticipated a £70bn shortfall based on the calculations used in 2013, but a higher discount rate used by actuaries for the LGPS meant the deficit was reduced “significantly”.

However, KPMG warned that schemes might be taking on more risk due to the actuaries’ decision. They raised the discount rate by 25 basis points a year relative to UK government bond yields.

Steve Simkins, pensions partner at KPMG, said: “The fact that the deficit fell in such difficult market conditions highlights the increasing reliance of the LGPS on the future performance of its assets and this puts employers in a higher risk position.”

Insurer Phoenix Life completed a £1.2bn buy-in with its own pension scheme last year, according to consultancy LCP.

The deal was only announced this week, and was the largest completed during 2016. It is the fourth-largest buy-in transaction seen in the UK.

Despite the size of this transaction, Legal & General (L&G) dominated the UK de-risking market again in 2016, backing 33% of the deals completed during the year, LCP said.

In total, £10.2bn was transferred from UK pension funds to insurers through buy-in or buyout transactions, the consultancy said. Of this, L&G accounted for £3.3bn, with Pension Insurance Corporation taking £2.5bn.

Scottish Widows – a relatively new entrant to the UK market – was third with just under £1.5bn, a 14% market share.

The majority of transactions – worth £7.5bn – were completed in the second half of the year, “highlighting the surge in activity following the EU referendum”.

LCP said volumes in 2017 “could exceed £15bn for the first time”.

Notable 2016 deals included ICI Pension Fund’s five transactions totalling £2.7bn and split between L&G and Scottish Widows, and the £1.1bn full buyout of the Vickers Pension Plan by L&G.

Charlie Finch, partner at LCP said economic volatility and high-profile pension cases such as BHS had helped drive demand in 2016. In addition, pricing had been “at its most favourable level for five years relative to holding gilts”. 

“Following the introduction of Solvency II last year, insurers have innovated and, in a post-EU referendum world, have been able to source attractively priced assets and pass back savings to pension plans through lower pricing,” Finch added. 

Finally, the Financial Reporting Council (FRC) wants investors, analysts, and listed companies to help construct new risk and viability reporting standards.

The project, led by the FRC’s Financial Reporting Lab, “will explore how companies can develop effective principal risk reporting and viability statement reporting to meet the needs of investors,” the council said in a statement.

“The project will commence in May 2017 with output expected to be published in time to be helpful for December 2017 year-end annual reports,” the FRC said.

Responses are invited by 21 April. The full statement is available here.

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