Majority of DB schemes expect to approach an insurer about de-risking within five years

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A surge in bulk annuity deals is becoming increasingly likely, with more than 86% of defined benefit (DB) pension scheme trustees expecting to approach an insurer in the next five years, according to new research from Standard Life, part of Phoenix Group.

The research among 50 pension trustees managing DB schemes with assets over £100m, found that 50% anticipate their scheme will approach an insurer about a buy-in or buy-out in the next one to five years. Over a third (36%) said they may approach an insurer even sooner, within the next year.

This high demand for de-risking activity comes as more than 92% of trustees reported that the economic environment over the last year has improved their scheme funding level, with DB schemes having benefited from factors including a rise in gilt yields, high inflation rates, and slowing longevity improvements, the research found.

Kunal Sood, managing director of defined benefit solutions and reinsurance, at Standard Life, said: “Bulk purchase annuity (BPA) deals have long been considered the gold standard when it comes to de-risking, but sufficient funding is a key factor and for many pension schemes, a BPA deal was not in their short-term horizon, even just a year ago.

”However, driven in part by the increase in gilt yields and inflation rates, scheme funding levels have improved to the point where BPA deals are now a near-term solution for many DB schemes, as our research shows. This new funding environment has helped drive demand across the market, which is on track to meet expectations that 2023 will be a record-breaking year in terms of BPA deal volumes.”

Additionally, 95% of trustees reported that pricing was an important factor that determines whether they choose buy-in or buyout as their endgame strategy.

Kunal Sood added: “Trustees have many factors to consider when it comes to their de-risking strategy, however, with many schemes in a strong funding position, it is unlikely the current appetite for buy-ins and buyouts will slow down.

”This means it is crucial that schemes prioritise preparation and ensure they have clarity on their requirements and objectives, so that they are well prepared to maximise insurer engagement. This will help schemes keep pace in a fast-moving market and ensure their de-risking journey is smooth and successful.”