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Pension Market Round Up

Defined Benefit Pension Market Round-Up

Wednesday, 29 January 2025

The first half of 2024 saw an unprecedented 133 bulk purchase annuity (BPA) transactions completed, resulting in the transfer of more than £15.1bn in pension liabilities. The record number was driven by a ‘surge’ in smaller transfers, according to a report from Aon.

The bumper period for BPA deals was also due to several new market participants, including Royal London and Utmost, which focused on bolstering capacity to support larger numbers of small cases. Aon reported that 83% of deals written in H1 2024 were valued at below £100m, while many established insurers lowered their minimum transaction sizes.

However, Aon’s survey of pension schemes suggested many still faced ‘their fair share of challenges’ in managing illiquid pension assets not considered suitable for buy-in transactions. In such cases, more sophisticated BPA strategies are required to maximise value and keep costs to a minimum. That said, the report suggests the bulk annuity market shows no signs of slowing down, and 2025 is expected to remain ‘very busy’ for deals of all sizes, with a high volume of auctions taking place in Q1.

Endgame strategies under focus as DB funding improves

The large surplus for UK Defined Benefit (DB) pension schemes is influencing ‘endgame’ decisions for pension trustees and sponsors looking to proceed with insurers, according to LCP’s Pensions Explorer. It reported that the surplus for the UK pension schemes of FTSE100 companies increased to around £65bn over the month of October.

LCP noted that

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‘Following the increase in company employment costs announced in the Budget, pension scheme sponsors may start exploring all options for cost control, reviewing pensions spend, and considering ways to use the scheme to deliver cashflow benefits for both them and pension scheme members.

Meanwhile, PwC’s Buyout Index recorded a record surplus of £330bn for the UK’s 5,000 corporate DB schemes, representing a significant surplus over the estimated cost for schemes seeking buyouts. PwC attributed this increase to improved buyout pricing offered by insurers and rising gilt yields.

The news of higher surpluses came ahead of the Chancellor’s keenly anticipated Mansion House speech, which promised to introduce “the biggest pensions reforms in decades,” including introducing pension megafunds to unlock an estimated £80bn of investment for infrastructure projects and businesses of the future. PwC’s Head of Investments, Keira-Marie Ramnath, said, “The UK needs to be more attractive for investment as returns in the UK market have lagged global counterparts… It’s no easy feat and the Government will have to balance their desire for increased investment from pension schemes in UK productive assets with their borrowing needs.”

Average time to buyout for DB pension schemes falls to 5.2 years

The average time for FTSE350 DB pension schemes to be able to buyout their liabilities fell to 5.2 years to the end of October 2024, according to the DB End Gauge published by Barnett Waddingham. The DB End Gauge estimates the average time for UK DB schemes for FTSE350-listed companies to reach ‘a sufficient level of funding’ to buyout their liabilities with an insurance company. It is considered to offer crucial insights into pension scheme journeys and timings of buyout decisions during periods of changing inflation expectations and fluctuating asset performance. 

October’s decline, the largest monthly decrease since February, was attributed to gilt yields rising significantly. The 15-year gilt yield rose to 4.80% by the end of October, up from 4.455 at the end of September, fuelled by speculation during the month over changing fiscal rules and borrowing measures expected in Labour’s Autumn Budget.

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