Consolidation and buyout activity

With many pension schemes now moving closer to their long-term objectives we are seeing a heightened interest amongst corporate sponsors in reducing their DB pension risks. 2018 was a record year for the bulk annuity market and 2019 has already surpassed that. Pension professionals expect this trend to continue in the future. Over eight in 10 survey participants expect a major increase in buy-in/buyout activity in the next five years (Figure 9) and fewer than one in 20 think such a trend is unlikely to take place.

Looking at schemes’ own plans, around four in 10 are considering or planning a bulk annuity transaction in the next three years, and around two in 10 are considering or planning a longevity swap/insurance transaction over the same period. The short-term horizon then suggests significant activity to reduce pension risks and a major increase in the buyout market. Yet, whether the bulk annuity market has sufficient capacity to cover the potential demand from schemes and sponsors remains unclear.

 

Figure 9: How likely do you think it is that there will be a major increase in buy-in/buyout activity?

Where buyout is not considered achievable for the foreseeable future, some schemes may consider transferring responsibility for paying pensions to a so-called ‘commercial consolidator’. These can be conceptualised as exchanging the employer covenant for a capital buffer (and often an improved funding level, which the sponsor would pay for as part of its negotiated exit). The security would be lower than under a buyout (and hence more easily affordable) but, in some circumstances, trustees might judge that the balance of risks is more favourable than if they hope the employer will be able to support the scheme in future.

The Government sounded enthusiastic about consolidation in its 2018 White Paper but has yet to settle on a regime for regulating them. There is nothing in the Pension Schemes Bill, as introduced, and the Secretary of State for Work and Pensions has said that “the Government have not yet come to a collective view on the best way to take this forward”⁶

In our survey, we find that 1 in 3 respondents think it is likely that ‘commercial consolidators’ will emerge as a significant trend within DB pension schemes (Figure 10). If this does occur, alongside the ongoing increase in pension de-risking, then the DB pension landscape could begin to look very different in the future.

 

Figure 10: How likely do you think it is that a significant number of schemes will be absorbed by ‘commercial consolidators’ in the next five years?

⁶ http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/
work-and-pensions-committee/the-work-of-the-secretary-of-state-for-work-and-pensions/oral/106392.pdf