The U.K.’s pension de-risking market is expected to have a record-breaking year in 2023 in terms of volume of buy-ins and buyouts, according to an analysis from London-based law firm Lane Clark & Peacock.
“2022 was a roller-coaster year but the average DB pension scheme starts 2023 in much better shape than a year ago,” Charlie Finch, a partner in LCP’s de-risking practice, said in a statement. “Alongside more transaction volumes, we expect to see a further increase in the number of large schemes using buy-ins and buy-outs rather than self-sufficiency.”
The firm projects a sharp rise in demand for buy-ins and buyouts this year and in coming years, which it attributes to a significant improvement in funding in 2022. It said the average full buy-in/buyout funding level improved by approximately 15%, and plans jumped more than five years forward toward being fully funded against the cost of full insurance.
In light of the expected increase in de-risking activities, LCP is urging plans that are considering a deal to “get their homework done so they are transaction ready and fully prepared before they enter the market.”
In its analysis, LCP provides five predictions for the market in 2023:
1. Buy-in/out volumes will be at their highest ever.
LCP said it expects buy-in and buyout volumes to top the record £43.8 billion ($53.3 billion) reported in 2019, despite gilt yields being much higher than they were four years ago. However, a busy market means pension plans “will need to work doubly hard to get ready and ensure that insurers will want to participate.”
2. Pricing will continue to be attractive for plans that prepare properly.
LCP says pricing is currently at “historically attractive levels” for both retirees and deferred retirees. The firm expects attractive pricing will remain available for plans that have “positioned themselves attractively” to insurers in 2023 if current market conditions continue. However, it anticipates the plans will “have to work much harder than in the past to secure active insurer participation.”
3. There will be fewer partial buy-ins, fuller buy-ins.
Pensions are now working with higher collateral levels to protect against future gilt yield rises following the 2022 bond market meltdown. LCP’s position is that this means there is less capacity for younger plans to conduct partial buy-ins. For larger plans, “this may tilt the balance from using buy-ins to using longevity swaps to hedge longevity risk, but care needs to be taken as longevity swaps themselves typically require collateral.”
4. New innovation will help address the illiquid asset challenges for plans.
The illiquid assets held by some plans are an increasingly common barrier to full insurance, the LCP report said. Because this has been exacerbated by the LDI crisis, the firm predicts new innovations will address this challenge, such as better ability to transfer illiquids to insurers with innovative deferred premium structures and other options that help preserve value.
5. An increased chance of a new entrant entering the buy-in/out market.
Because there has not been a new entrant in the bulk annuity market in several years, LCP predicts that 2023 has “the highest chance that a new entrant emerges” due to the changing supply-and-demand dynamics in the market. The firm expects any new entrant to be an existing insurer because of the high barriers to entry.