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Out-Law News 2 min. read

Demand for UK bulk annuity buy-ins to eclipse market capacity within 10 years


Demand for UK defined benefit (DB) pension scheme bulk annuity buy-ins is set to rapidly outstrip supply, and is likely to exceed market capacity by £125 billion within 10 years, according to pensions consultancy Hymans Robertson.

DB schemes and insurers will also seek to invest in over £300bn of additional gilts, or government bonds, over the same period as market uncertainty following the Brexit vote and soaring deficits increased their need for secure assets, according to the consultancy.

Scheme finances, already stretched over the past decade, have worsened further since the UK's vote to leave the EU, with the Bank of England's recent interest rate cut and increase in quantitative easing (QE) pushing bond yields to record lows and having a knock-on effect on scheme liabilities, according to pensions expert Robert Tellwright of Pinsent Masons, the law firm behind Out-Law.com.

However, schemes seeking to offload some of their liabilities to an insurer through a buy-out deal still had "plenty of reasons to be confident", he said.

"Despite one recent high profile withdrawal, new entrants and new capital continue to reach the bulk annuity market," he said.

"The competition for gilt yields creates its own challenges, but insurers are responding to this in a variety of ways. Many are diversifying their investment strategy so that they are less reliant on gilts, and able to gain better returns through holding long-dated, illiquid asset classes such as infrastructure, which still provide a reasonable match for their annuity liabilities."

In the meantime, the immediate concerns for many DB schemes would be "whether ongoing accrual of benefits remains affordable, and how to address inflated scheme deficits in a sensible and proportionate manner", he said.

Previously, Tellwright said that DB trustees with the right governance and preparations in place to enable them to transact quickly could be able to take advantage of post-Brexit vote market volatility in order to "lock-in" favourable pricing from insurers.

Buy-outs and buy-ins effectively relieve companies of the investment and longevity risks associated with their historical DB schemes. The majority of these schemes are now closed to both new members and further accrual of benefits, creating an opportunity for insurers to take over a share of the liabilities in exchange for a premium.

The combined UK DB pension scheme deficit has now reached £1 trillion, while market movements since the Brexit vote has increased the length of time it will take each scheme to reach self-sufficiency by an average of three years, according to Hymans Robertson. The central bank interest rate cut and increase in quantitative easing (QE) announced by the Bank of England earlier this month have both reduced schemes' returns on their investments in gilts as well as further inflated deficits.

"Rather than sitting tight and waiting for financial conditions to improve, trustees and sponsoring employers need to take proactive steps to chip away at the problem and capture opportunities to reduce risk in stages," said James Mullins, Hymans Robertson's head of buyout solutions.

"There are clear advantages in trying to reach self-sufficiency via a series of well-planned buy-ins, rather than waiting to do it all in one go via a buy-out ... With the added uncertainty and volatility that has emerged from the decision to leave the EU, we predict this will accelerate scheme de-risking strategies, moving schemes further along the road to becoming more resilient to risk," he said.

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