49% of pension schemes are now targeting buy-out as their long-term objective, up from just 15% four years ago, according to a Hymans Robertson survey of 100 defined benefit pension scheme trustees*. In the same period the number of pension schemes aiming for self-sufficiency as their long-term objective fell to 37%, from 81% four years ago. The remaining 14% of pension schemes are targeting a form of consolidation as their long-term objective.

This material growth in demand from pension schemes to insure risk is also captured in the leading pensions and financial services consultancy’s half year risk transfer report, which is issued today. The report summarises all of the activity in the UK market for buy-ins, buy-outs and longevity swaps, both over the last year and since this market took off in 2007. It shows that £25bn of pension scheme risk was insured in the first six months of 2020 and that 40% of FTSE100 companies that sponsor defined benefit pension schemes have now completed buy-ins, buy-outs or longevity swaps.

James Mullins, head of risk transfer at Hymans Robertson comments:

“This growing demand from pension schemes means that, even with the additional challenges posed by COVID-19, we expect the total number of buy-ins and buy-outs in 2020 to increase from the 153 transactions seen in 2019. However, the lower number of £multi-billion buy-in transactions this year means that we expect the average transaction size to be lower than the £286m we saw in 2019. So the total transaction value in 2020 for buy-ins and buy-outs is likely to be around £30bn, which is around two-thirds of the 2019 total of £43.8bn.”

“Our trustee survey shows that pension scheme enthusiasm for buy-ins and buy-outs continues to grow and we expect demand to average £37bn a year over the next decade. This 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 £0.25 trillion of pension scheme longevity risk having been insured via buy-ins, buy-outs and longevity swaps, since this market took off in 2007. Interestingly, half of the value of these pension scheme insurance transactions (£0.125 trillion) has taken place in just the last four years alone. This is a clear illustration of the strength of the further growth potential in this market.”

*Hymans Robertson’s annual Trustee Barometer surveys 100 trustees of private defined benefit pension schemes with AUM >£50m. The survey is carried out by a third party and all responses are confidential.

The half year risk transfer report can be found here.