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Why you might be buying out your pension plan sooner than you think

Our viewpoint

LCP’s latest Pensions De-risking report predicts a boom in the number of defined benefits pension plans completing full transfers to insurers. This will mean that more members will find their pensions being administered by insurers as employers increasingly cut their scheme ties in response to increasing affordability and attractive pricing. Charlie Finch explores what is driving this trend and why the market has reached a tipping point.

The story so far

The new phase has been reached thanks to affordability hitting record levels and attractive pricing. This has come about as a result of stalling life expectancies, good asset performance and competitive pricing between insurers.

Over the past two years, we estimate the buy-out funding position of the average FTSE100 UK pension scheme has improved by around 10%, which makes a full transfer to an insurer an increasingly viable option. In a recent survey we undertook of pension plans, over 25% said they expected to reach their long-term goal within the next five years. The figures highlight the momentum in the market. With around £2,300 billion of DB pension liabilities in the UK you can see why it feels that the market is reaching a tipping point.

What’s next?

To date, few companies with large pension schemes have moved their pension plans to an insurer in full. For example, there has been less than £5bn of full buy-outs ever from FTSE 100 pension plans out of £800bn of pension liabilities. But that is beginning to change with recent examples of large blue-chip companies fully insuring their £1bn plus pension plans, including Rolls Royce in November 2017, Rentokil Initial in December 2018 and Commerzbank in March 2019. Remarkably, in all three cases the pricing was such that the plans were insured in full with no cash injection from the sponsor.

We believe this is the tip of the iceberg. For example, if current FTSE 100 deficit contribution levels continue at c£7billion per year then we predict a huge rise in FTSE 100 companies who can afford to transfer their UK pension plans to an insurer in full. We project that around 30 FTSE100 companies will have UK pension plans reach or be close to fully funded on buy-out within the next decade, equating to £300bn of pension liabilities.

As we start to see an increasing number of large companies take the step to transfer their liabilities off balance sheet it is likely that the acceptability of this step will grow, further accelerating the trend for companies to do so.

2019 is certainly warming up to be an exciting year for the market, with many companies and trustees exploring ways of managing their pension plan risks and liabilities in volatile conditions. We expect this year to see further landmark transactions but also to herald a new phase as full buy-outs increasingly become the norm.

To find out more on the latest developments in the buy-in and buy-out market and the opportunities available to trustees and sponsors, register for our de-risking breakfast briefing on 4 June.

Are we at the tipping point?

Are we at the tipping point?

Pensions de-risking report

With the market at a tipping point, the key question is whether pension plan demand could outstrip the available insurance capacity for the first time in 2019.

Download the 2019 report