A new report published today by pensions consultancy Lane Clark & Peacock (LCP) found that full transfers from FTSE100 defined benefit company pensions schemes to insurers through full buy-outs could increase from £5bn to £300bn in total over the next ten years as the pension buy-out market enters a new phase.

LCP’s analysis found that, to date, the total volume of full buy-outs from UK pension schemes of FTSE100 companies currently amounts to less than £5bn out of £800bn of legacy pension liabilities as companies have struggled with large deficits.  This is set to change following a big improvement in affordability. In the past two years, the average FTSE100 pension scheme has seen its buy-out funding position improve by 10%, making a full transfer to an insurer increasingly attractive. This improvement in affordability has largely been driven by stalling life expectancies, good asset performance and strong price competition between insurers.

If current conditions persist, then LCP predicts a huge rise in FTSE 100 companies who can afford to transfer their UK pension schemes to an insurer in full with up to 40 companies likely to reach or be close to fully funded on buy-out within the next decade, equating to £300bn of pension scheme liabilities.

Charlie Finch, partner at LCP, commented:

“In the short term, the insurance market is entering a pension scheme buy-out boom due to increased affordability and attractive pricing. We predict that £300bn of pension liabilities from the FTSE100 alone could reach full buy-out funding over the new 10 years as pension plans enter the home straight towards fully securing benefits for their members.

For those individuals who have a final salary pension, they will be increasingly likely to find that it is no longer being provided by their former employer but by an insurer such as Legal & General or Pension Insurance Corporation who took on over £15bn of pension liabilities between them last year through buy-ins and buy-outs.

“As the demand for buy-ins and buy-outs grows, the key question is whether the market is approaching a tipping point where pension plan demand outstrips available insurance capacity.”

LCP found there were constraints that could impact insurer capacity, the most pressing being the availability of suitable investments to support current pricing levels. Crucially from an operational standpoint, whilst volumes can grow, the number of transactions cannot increase significantly without insurers expanding their teams or further development in technology.

Charlie Finch continued:  

“To date insurer capacity and pricing levels have kept pace with increasing demand but, at the current rate of growth, demand looks set to outstrip capacity over the medium term putting upward pressure on pricing and squeezing less attractive schemes out of the market.

“What is clear is that 2019 is set to be another bumper year for companies and trustees getting on top of their pension plan risks and liabilities. 2018 saw a record £24.2bn of pension liabilities transferred to insurers through buy-ins and buy-outs – nearly double the previous record of £13.2bn in 2014 – and we expect that 2019 could top £25bn for the first time.”