Capacity fear as derisking predicted to surge

Two thirds of the UK’s largest pension schemes plan to use insurance de-risking solutions according to new research, prompting adviser concerns over a capacity squeeze.

A Legal & General survey of over 40 of the UK’s largest private sector pension schemes, each with over £1billion in pension fund assets, shows that 64 per cent are looking to arrange some form of insurance de-risking solution to cover their liabilities, rather than retain and manage the risk themselves. The report found 47 per cent of interested schemes said that they were looking to arrange buy-ins or buyouts in the next 5 years while 67 per cent of schemes interested in longevity insurance, were looking to implement a solution in the next 5 years.

LCP says the levels of demand set out in the report mean transactions would increase to £25bn a year. Last year £12bn of assets were derisked.

The UK’s larger pension schemes are becoming a dominate force in the insurance de-risking market with the large scheme arrangements completed in the market over the past five years representing 75 per cent of the total of £80bn of insurance arrangements completed.

Based on the information in the 2014 Pension Protection Fund Purple Book, Legal & General’s Bulk Annuities and Longevity Insurance team, estimate that there is around £1trillon of liabilities and £0.7trillon of assets held by the £1billion plus UK pension schemes. The pension fund assets of the larger schemes surveyed as part of this Report, represent over £150 billion of pension fund assets and an estimated £200 billion of buyout liabilities.

Some of the UK’s largest pension schemes have been involved in derisking exercises in the last year, with transactions completed by the ICI Pension Fund, for £3 billion and the TRW Pension Scheme for £2.5 billion. Over two thirds – 69 per cent – of the large schemes surveyed said that liability management was an important factor in achieving their long term de-risking goals and 67 per cent have already implemented liability driven investment strategies, with the rest planning to do so.

Legal & General head of bulk annuities and longevity insurance Tom Ground says: “The De-risking journeys of large pension schemes report shows that almost two thirds, of large pension schemes are looking to insure their liabilities. However, it also shows that all stakeholders need to work together to overcome barriers and achieve successful outcomes. It’s all about certainty. The good news is that insurance and investment solutions now let pension schemes achieve this.

“2014 saw deficits of private sector schemes increase by over £100bn – more than double the annual UK corporation tax bill*. In reaction to market volatility 2014 saw large schemes execute a series of landmark arrangements including the largest buy-in, the largest buyout and the largest longevity hedging arrangement. These arrangements covered over £21bn of pension scheme liability.”

LCP Partner Emma Watkins says: “The report shows that the appetite for insurance de-risking continues to increase. The question now becomes one of market capacity. If just half of the 49 per cent of pension schemes reported as interested in bulk annuities look to undertake a deal covering half of their plan’s liabilities in the next five years, the bulk annuity market will need to provide capacity of around £125bn – equating to  around £25bn a year.  This represents a significant increase from 2014 which saw a record £12bn bulk annuity premium written.”

“In support of this finding, we are seeing the concept of managing longevity risk in tandem with market risks beginning to resonate with larger schemes.

“In the event there is more demand than supply, timing and preparation will be crucial to a successful transaction. As volatile market conditions will impact the comparative value of an insurance transaction, on-line price trackers, such as the one in LCP Visualise, allow trustees and corporate sponsors to monitor developments in buy-in pricing to ensure market opportunities are not missed. 

Having a working party in place with representatives from both the trustee and corporate boards will ensure effective and quick decision making when the time is right.”