Pension schemes need to take action to put themselves ‘at the front of the queue’ for the best de-risking deals
5 October 2022
Surging gilt yields have improved the funding levels of many pension plans, reducing buy-out shortfalls and eliminating them completely for a rising number of schemes. This is opening up opportunities to de-risk that weren’t there a couple of months ago.
But LCP partner Charlie Finch has warned that schemes have a lot of work to do to make sure they are ‘at the front of the queue’ for deals with insurers. Even before the recent surge in yields, activity levels in the de-risking market were significantly up in 2022 compared with the same period in 2021, with H1 2022 buy-in/out volumes up over 50% at £12.0bn.
Insurer pricing has improved over 2022 and, with further falls in gilts, de-risking is now looking very attractive. For schemes who have already transacted a buy-in and with capacity in their investment strategy, they can move quickly to extend the existing buy-in and lock into pricing opportunities, particularly where an umbrella contract is in place so no new contract is required.
However, for schemes yet to transact, there is typically a 6-month plus lead in time to completing any transaction. In the current market it is more important than ever to do the right preparation ahead of approaching insurers. Otherwise the insurers will simply focus their limited resources on other more attractive opportunities and any quotations received risk being disappointing.
According to LCP, a checklist of actions which schemes should be undertaking include:
- A review of investment strategy and hedging arrangements, ensuring they can meet any collateral needs and consider adjustments to lock in recent gains. That stability will provide time to consider options to further de-risk through a partial buy-in or even a full buy-out, which may now be affordable.
- Putting the right the right governance in place for a potential de-risking transaction, including appointing specialist advisers and agreeing objectives and getting key stakeholders on board.
- Preparing benefit specifications, data extracts and collection of marital information that is essential to a successful transaction.
- Working through the structure including residual risks, sizing the transaction within the wider investment strategy and planning out the asset transition.
LCP report that many of the insurers already have an extensive pipeline of new business with limited capacity to take on more quotations. Insurers have been recruiting heavily in recent months but, even taking this into account, LCP does not expect insurers to have the resource to quote on all of the opportunities that will come to market over the next 12 months.
Commenting, Charlie Finch said: "If markets stabilise at current levels then many pension schemes may find themselves sitting on big funding improvements compared to even a month ago. This could lead to a bonanza for de-risking markets next year as schemes seek to lock in the good news through buy-ins and full buy-outs and potentially some of the emerging solutions such as superfunds.
“But I would warn against a knee-jerk reaction. For most schemes, there is much that they will want to do ahead of approaching insurers to lock into the attractive de-risking terms. This involves really thinking through their strategy to market so they are fully prepared, including having undertaken the necessary data and benefit work, properly considered the structure including around residual risks and having good governance structures in place. Schemes should not underestimate the importance of a well-run process that takes everyone involved on what is probably the biggest step on any scheme’s journey.”