Analysis from XPS Group suggests the aggregate surplus for DB schemes on a long-term targets basis was unchanged at £176bn in August, with DB scheme assets totalling £1,462bn and liabilities at £1,286bn by the end of the month. This meant the aggregate DB scheme funding level continued to be 114% of the long-term value of liabilities. At the same time, aggregate scheme liabilities fell slightly, which XPS attributed to reduced inflation expectations.
XPS Group Senior Consultant, Henry Shore, said, “Despite investment market volatility over the month, aggregate pension scheme surpluses have remained stable and continue to be at record levels.”
Surge in pension buyouts to bolster H2 de-risking transactions
After a relatively quiet H1, PwC data predicts a ‘surge’ in demand for pension scheme buyouts in the latter half of 2024, after its Buyout Index revealed DB pension schemes still had sufficient assets on average to buy out their pension liabilities.
PwC’s August Buyout Index reported the UK’s DB pension schemes reached a new record surplus of £285bn in July, significantly above the estimated cost for schemes to ‘buyout’ their pension promises. The Buyout Index, which covers the complete universe of around 5,000 UK DB pension funds, reflects indicative market pricing based on its current experience of completing buy-in and buy-out transactions. PwC’s Low Reliance Index, which assumes schemes invest in low-risk, income-generating assets such as bonds, maintained a record surplus of £410bn.
However, while the data showed DB schemes had sufficient assets on average to buy out their pension liabilities, it also revealed that scheme liabilities were increasing. The aggregate surplus fell in August by £5bn to £280bn, with a £45bn increase in liabilities outweighing a £40bn rise in assets. The aggregate funding ratio also fell during the month, by 1% to 124%.
According to John Dunn, Head of Pensions Funding and Transformation at PwC UK, “The position of the UK's 5,000 DB schemes has never looked stronger and we are pleased to see the new Government has put pension schemes at the heart of its mission to boost growth and make every part of Britain better off. Defined benefit pension schemes can play a part in this growth, particularly if the initiatives around surplus sharing as an incentive for schemes to run-on are pushed forward.”
He continued, “While a number of schemes that were targeting an insurance transaction are now re-evaluating their options, for example to consider running the scheme on, many are continuing full steam ahead towards their goal of securing members’ benefits with an insurer.”
PwC’s UK Head of Bulk Annuities, Dweenisha Caleechurn, added, “The first half of the year may have been quieter than expected, but we’re confident that overall, we’re looking at a record number of transactions this year.”
Bulk Purchase Annuities market set for 'strong' finish to the year
That positive outlook for bulk purchase annuities (BPA) for 2024 and beyond was confirmed by Standard Life, which said it expected more than £40bn of BPAs to transact by the end of this year. According to Kunal Sood, Standard Life’s Managing Director of DB solutions and reinsurance, the BPA market has seen a steady increase in the number of billion-pound transactions since 2021, with publicly announced billion-pound transactions increasing from six in 2021 to nine in 2023. Sood expects the number of billion-pound-plus transactions to exceed that number for full-year 2024.
Standard Life noted that despite the high levels of BPA market activity, insurers are continuing to build their teams and invest in technology to improve efficiency and meet the growing demand from pension schemes, including building further efficiencies in the pricing process through to the transition from buy-in to buyout.
However, Sood acknowledged that illiquid assets remain a “significant consideration” for many schemes looking to de-risk, and that even those schemes that have seen their funding levels improve markedly in recent years could still have illiquid assets that wouldn’t be “traditionally suitable” for meeting a BPA premium. Sood said, “Our research echoes this, with employee benefit consultants (EBC) and professional trustee firms saying they found dealing with illiquid asset holdings in the context of a bulk annuity transaction challenging.”
While illiquid assets are not usually a natural fit for insurer balance sheets, Sood pointed out that insurers continue to look for solutions to scheme-specific requirements, whether by supporting schemes’ liquidity needs, helping members retain links to defined contribution arrangements, or providing cover for data and benefit risk.
Innovative pension platform support from EQ
Against this backdrop, diligent preparation and early insurer engagement remain vital components for successfully navigating the market. For over 187 years, EQ has been working with pension schemes, members, managers and trustees to deliver innovative retirement solutions. With technology at its core, our pension platforms support clients with all their pension administration needs.