UK DB Schemes Targeting Buyout Treble in Past Five Years

LONDON, Aug. 15 -- Willis Towers Watson, a risk management, insurance brokerage and advisory company, issued the following news release:

The number of defined benefit (DB) pension scheme trustees targeting a buyout with an insurer has increased significantly in the past five years, according to new research from Willis Towers Watson. A third (32%) are targeting buyout outright, with a further 5% aiming to run the scheme off over time with a buyout-like level of funding. The remainder plan to do so with various levels of investment risk/reliance on the sponsor.1 In comparison, in 2013 only 11% reported a buyout as their target.

Shelly Beard, Senior Director of Transactions, Willis Towers Watson said, "Some schemes will be closer to buyout than they think. For example, because insurance pricing can be keener than the actuary's solvency valuation, or because insurers' life expectancy assumptions have softened since the last actuarial valuation. We have recently seen some of the most competitive buy-in and buyout pricing for a decade, particularly for pensioners. Alongside this, the growing demand from members for DB transfers can cut the cost to the employer of getting the remaining non-pensioner liabilities off its books. Finally, as more members retire and move to pensioner status, the buyout cost for them reduces."

"Over time, increased demand for securing liabilities will require an increase in supply. Perhaps the biggest question mark concerns the availability of long-term assets carrying an illiquidity premium. Typically, these account for 30% to 40% of the investments a buy-in provider makes to back the pension commitments it takes on. If supply does not keep pace with demand, prices could worsen slightly. To get the best prices, schemes may have to be flexible as to when they transact, being at the front of the queue when a chosen insurer can source appropriate assets."

Long term journey planning is the most commonly cited priority both for trustees and scheme sponsors - 63% of trustees and 68% of pension managers list it amongst the three most important issues for them over the next three years.

The number of schemes with long-term journey plans, which document these ultimate goals, has remained steady in the past five years, at around two-thirds. For the remaining third of schemes, 22% are in the process of developing a plan, a significant increase on the 6% who said the same five years ago, as schemes mature and are closed to new benefit accrual.

The Government stated that one of the key changes to result from its March 2018 White Paper is to require every scheme to be explicit about its long-term objective.2 A more substantial Code of Practice on scheme funding from the Pensions Regulator will describe how the statutory funding targets that employers and trustees must usually agree every three years "would be staging posts or steps on a journey plan towards achieving the long-term objective."3

Graham McLean, Willis Towers Watson's Head of Scheme Funding, said: "Focusing on where the scheme ultimately wants to get to sounds like an obvious thing to do. In practice, some sponsors may be wary of locking in more demanding long-term targets if they fear this will limit their flexibility when it comes to agreeing contributions over the next few years."