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2 January 2018

Stalling life expectancy
creates opportunities for companies to pass pension schemes to insurers

A report published today by pensions consultancy LCP shows that lower projected life expectancies have created the best opportunity for companies to transfer defined benefit pension schemes to an insurer since the banking crisis in 2008.

One in five FTSE100 UK defined benefit pension schemes are now estimated to be over 80% funded relative to the cost of buy-out with an insurer, up from one in eight a year ago.  Some finance directors will conclude that writing a cheque to bridge the gap to buy-out and remove the pension scheme from their balance sheet has become an attractive option for shareholders.  

LCP’s analysis shows that average buy-out funding has increased by nearly 10% since the immediate aftermath of the EU Referendum in August 2016 to reach the highest level since the banking crisis in 2008.

LCP expects a 50% increase in volumes of UK pension liabilities being insured in 2018 as pension schemes take steps to reduce risk.  This will set a “new norm” with annual volumes increasing to over £15bn.  Insurer back-book transactions are likely to provide competition for capacity, with Prudential for example currently considering options for transferring part of its annuity fund to other insurers.  

In response to the anticipated rise in demand, incumbent insurers are increasing their capacity.  LCP estimates total insurer capacity for 2018, across buy-ins, buy-outs and annuity back-books at upwards of £25 billion which is a £5 billion uplift since last year.

Charlie Finch, LCP partner and author of the report, warns pension schemes to stay on top of these trends:

“Companies looking to reduce pensions risk are finding the best financial conditions to do so since the banking crisis.  Prompt action will allow them to benefit from the current high-level of competition between insurers.”

“The improvements in affordability mean that many pension schemes can currently reduce risk through insurance.  Some finance directors will conclude that now is the time to write the cheque and transfer the scheme in full to an insurer.  Even where that remains unaffordable a partial transfer to an insurer through a buy-in is usually achievable at no cash cost.”

The improved affordability has been driven in large part by recent heavier than expected mortality data.  New data published in 2017 resulted in lower projected life expectancies, with the life expectancy of a 65 year old man falling by nearly half a year.  On average, this new data has reduced pension scheme liability values by around 3%.

Commenting on the factors driving funding level improvements, Finch 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.”

With mortality rates in 2017 continuing to be heavier-than-anticipated, Finch expects the improvements in buy-out funding levels to continue into 2018 provided investment markets remain buoyant.  

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