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De-risking deals to trickle down to smaller schemes – survey

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Liability management deals for mid-sized UK private sector defined benefit (DB) pension schemes are becoming more viable and may very well contribute to what is anticipated to be a strong year for de-risking transactions, according to Barnett Waddingham, an actuarial and consultancy services provider.

The company published the findings of its fourth annual survey* of DB schemes in the UK with more than £1bn (€1.3bn) in assets, noting that only 3% remained open to new members.

Fewer schemes have a deficit on a company accounting basis, down to 67% from 75%, Barnett Waddingham said, noting that schemes with a lower or no deficit “may be more able to secure their liabilities with an insurance company”.

Andrew Vaughan, partner at the consultancy, said activity among the largest private sector schemes, such as the removal of longevity risk and liability-driven investment strategies, “will inevitability work its way down to smaller schemes”.

He added: “Only a handful of big defined benefits schemes remain open to new members, and the number closed to future pension accrual is increasing year on year.

“Many of these will ultimately be looking to the insurance market to transfer risk through buyouts or buy-ins, medical underwriting and longevity risk transfers.

“We have seen a significant amount of activity in these markets in the last year, and we expect this to continue.”

Barnett Waddingham expects more than £20bn in longevity risk transfer deals this year.

Longevity swaps have in the past been the preserve of the largest pension schemes, but they are becoming more accessible to mid-sized schemes due to “growth in reinsurer appetite, efficiencies and innovative structures”.

Aon Hewitt has said this year is likely to bring another record for bulk annuity and longevity swap deals.

Releasing its 2016 risk settlement market report, the company noted that risk settlement transactions exceeded £30bn last year compared with £22bn in 2014.

Martin Bird, senior partner and head of the risk settlement group, said Aon Hewitt was “confident 2016 will again be a bumper year for the risk settlement market”.

He added: “Volatility in stock markets in 2015 and continued low yields posed challenges to funding levels, but once market conditions improve, pension schemes will start de-risking, and there will be a market of £20bn or more required for bulk annuity transactions alone.”

*The survey covers 160 schemes and is based on publicly available data up to 31 October 2015

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