Because of the improving funding levels of the pension funds of some of the UK’s largest companies, there will likely be a sharp rise in the number of de-risking actions in 2018, according to a recent report from London-based consulting firm Lane Clark & Peacock.
According to the consulting firm, the number of FTSE 100 pension plans estimated to be more than 80% funded relative to the cost of buy-out with an insurer has nearly doubled over the past two years. The report found that 20% of the pension funds among the FTSE 100 companies were more than 80% funded in 2017, up from 13% in 2016, and 11% in 2015. It also found that the average buy-out funding level has increased by nearly 10% since August 2016, just after the UK voted to leave the European Union.
“As a result of this improved affordability,” said the report, “we predict a marked increase in demand from pension plans to de-risk in 2018, but also an increase in insurer capacity to cater for higher volumes.”
Insurers are reporting a pipeline of more than £30 billion ($40.5 billion) in deals going into 2018, according to Lane Clark & Peacock. It also said that a main source of pension plan demand this year has been repeat transactions for plans that have already enacted de-risking plans.
The report said that 2017 volumes for buy-ins and buy-outs are expected to exceed £10 billion for the fourth consecutive year. The largest volume insured by a single pension plan in 2017 was £1.2 billion by the Pearson Pension Plan, divided between two buy-ins with Aviva and Legal & General. Meanwhile, the largest single transaction was the £725 million full buy-in of the Former Registered Dock Workers Pension Fund with Pension Insurance Corp.
Looking toward 2018, the report said that considering the competitive dynamics across the market, it anticipates significant capacity available for pension plan transactions.
The average buy-out funding level is now at its highest level since before the banking crisis in 2008, said the report. However, despite FTSE 100 companies having paid more than
£150 billion into their pension plans over the past 10 years, the report found little resulting gain in overall funding, saying that it is this “challenging backdrop” that has been the main driver for companies to de-risk their pension plans.
“Conditions for de-risking are currently at their most favorable since before the banking crisis in 2008,” said Charlie Finch, a partner at Lane Clark & Peacock, “with the level of competition, pension plan funding, and pricing all at attractive levels.”