• Buy-ins/buy-outs and longevity swaps have insured £0.3 trillion of risk from DB pension schemes since 2007;
• By the end of 2031, an additional £0.7 trillion of DB pension scheme risk is expected to have been insured;
• Around £450 billion of this growth is expected to come from buy-ins and buy-outs, at an average of over £40 billion a year up to 2031, with the remainder coming from longevity swaps;
• During 2020, around £55 billion of DB scheme risk was transferred to insurance companies – the second highest total on record – with around £30 billion of buy-ins/buy-outs and £24 billion of longevity swaps.

£1 trillion of risk from DB pension schemes is expected to have been insured by the end of 2031, according to analysis by Hymans Robertson as it publishes its 2021 Risk Transfer Report today. The annual report analyses the rapidly growing market for Defined Benefit (“DB”) pension schemes to transfer their risks to insurance companies, via bulk annuities (“buy-ins” and “buy-outs”) and longevity swaps.

The analysis undertaken by the leading pensions and benefits consultancy in its report shows that since this market took off in 2007, buy-ins/buy-outs (c£180bn) and longevity swaps (c£110bn) have already insured £0.3 trillion of risk from DB pension schemes. Further analysis by the firm projects that by the end of 2031, an additional £0.7 trillion of defined benefit pension scheme risk is expected to have been insured as a result of significant projected growth in this market, resulting in a total of £1 trillion.

According to the report around £450 billion of this growth is expected to come from buy-ins and buy-outs, with the remainder coming from longevity swaps. During 2020, around £55 billion of defined pension scheme risk was transferred to insurance companies, with around £30 billion of buy-ins/buy-outs and £24 billion of longevity swaps. Despite the additional challenges posed by COVID-19, 2020 was the second highest total on record, only narrowly behind the record year in 2019.

Putting this analysis into context, James Mullins, head of risk transfer at Hymans Robertson, says:

“£1 trillion of insurance would be equivalent to around half of the value of all gilts currently issued by the UK Government or around half the value of all of the companies in the FTSE 100. Indeed, with the level of growth in pension scheme buy-ins and buy-outs that we are projecting, we can expect to see several insurance companies become some of the largest companies in the FTSE 100 over the next 10 years.

“Our analysis projects when each individual defined benefit pension scheme in the UK is expected to be able to afford to insure its pension promises. These projections show that we expect demand from pension schemes for buy-ins and buy-outs to average at over £40 billion a year during the next decade. This is due to a combination of factors such as funding requirements meaning that sponsoring employers will need to fund pension schemes to a higher level and the cost of insuring deferred member liabilities having reduced materially in recent years. These points mean that the additional money a pension scheme needs to get to buy-out is less than it has been in the past. This gap will reduce further as pension schemes mature, as more contributions are paid in and as investment risk is reduced further.

“The UK pension scheme risk transfer market is leading the world in terms of volume, maturity and innovation, with around £0.3 trillion of pension scheme risk now having been insured via buy-ins, buy-outs and longevity swaps. To put that into context, that means that the longevity risk associated with around 17% of all defined benefit pension scheme liabilities in the UK has now been insured, up from just 1% ten years ago. Pension scheme risk transfer is developing rapidly in other countries too, such as the USA, Netherlands and Canada and those countries are watching with interest how the market develops in the UK.”