Nearly half of defined benefit pension funds target buy-out

The number of funds aiming for a buy-out has increased to 49%, compared with just 15% four years ago, according to a survey by Hymans Robertson

About half of all UK defined benefit pension funds are now targeting a buy-out as their long-term objective, new research shows.

A survey of 100 DB pension scheme trustees by consultancy Hymans Robertson revealed the number of pension funds aiming for self-sufficiency has dropped markedly in the past four years, down to just 37% from 81%.

Now, the number of funds aiming for a buy-out has increased to 49% - up from just 15% four years ago. The remaining 14% are targeting a form of consolidation, Hymans Robertson said.

The firm's half-year risk transfer report found £34.56 billion ($45 billion) of pension scheme risk was insured in the first six months of this year, and that 40% of FTSE100 companies that sponsor DB schemes have completed buy-ins, buy-outs or longevity swaps.

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, Hymans Robertson head of risk transfer James Mullins said.

However, Mullins said the average value of those transactions is expected to decrease, with the firm anticipating total transaction value for 2020 to be about £41.47 billion ($54 billion) compared to £60.67 billion ($79 billion) in 2019.

The survey shows that pension scheme enthusiasm for buy-ins and buy-outs continues to grow, he added, saying demand is expected to average £50.69 billion ($66 billion) a year over 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, Mullins said.

He said, 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.

Hymans Robertson surveyed 100 trustees of private DB schemes with upwards of £69.12 million ($90 million) in assets.