Should you consider buy-in now?
Achieving your ultimate pension goal
12 Jul 2019
TPR’s continued emphasis around setting an appropriate Long Term Objective (LTO) has prompted many trustees and sponsors to review the ultimate goal for their scheme.
As a result, we’re seeing a significant shift in the goal-posts, with many more schemes now targeting buy-out – we expect this shift will continue as schemes mature and review their objectives.
Whilst it’s encouraging to see more trustees targeting buy-out as their end goal, it’s crucial they have a measurable plan and specified time frame in place to achieve that goal.
Buying-in to reach your LTO
A buy-in could help schemes reach their end goal with more certainty. Not only does a buy-in allow schemes to better match the benefit cashflows, it also provides some protection against members living longer than expected.
Many schemes are aiming to complete a series of well-planned buy-ins as part of the journey to the buy-out objective. This allows you to take advantage of attractive opportunities as they arise and protects against uncertain buy-in pricing in future if you wait to buy-out all in one go.
When is the right time to transact?
A question I get asked regularly is, should we consider a buy-in now? UK DB schemes are now holding over 50% of their investments in bonds, with the majority of this in ultra-low yielding government bonds. Schemes are looking for alternative ways to make their assets work harder. Buy-ins offer not only higher returns – transactions we’ve advised have resulted in scheme assets with a 33% higher return than government bonds – but are also a better match to the scheme’s cashflows.
Following a record breaking 2018, the volume of buy-in and buy-out transactions completed over the first half of 2019 has remained high. We expect this trend will continue as scheme funding positions improve and buy-out is increasingly viewed as the LTO. As a result, considering and planning a buy-in as early as possible is important.
Despite the increase demand from pension schemes, competitive buy-in pricing is available in the market currently, so this is an area schemes can certainly take advantage of if they adopt an intelligent approach.
Regardless of your scheme’s objective, it’s crucial you have a measurable plan and a specified timeframe for achieving that goal. By not doing so, too much is being left to chance – a buy-in now could make the future more certain.