Demand to transfer risk from the defined benefit funds of FTSE 350 companies is set to reach £350 billion ($457.5 billion) by 2026, outstripping supply in the U.K. insurance market, warned Hymans Robertson.
The consultant's annual risk transfer report said demand for bulk annuity buy-in transactions is likely to increase threefold, and will exceed capacity. Assuming a 5% increase in insurer capacity each year, Hymans Robertson said that in 10 years that equates to £225 billion of supply — a £125 billion shortfall compared with estimated total demand. A more optimistic annual growth in insurer capacity of 10% over the next 10 years would still result in a £65 billion shortfall.
The issue has been exacerbated by the U.K. vote to leave the European Union, which led to an interest rate cut in the U.K. to 0.25%, from 0.5% on Aug. 4. The report said this knock-on effect of Brexit has extended the time it will take DB funds to reach self-sufficiency by at least three years on average.
The report also said that over the next 10 years, DB funds and insurers will look to buy more than £300 billion of additional gilts. The report said in the last three years, the government has issued a total £180 billion of new gilts.
“These findings show that over the medium term at least, demand from DB pension schemes to complete bulk annuity transactions is likely to exceed the capacity insurers active in this market are able to supply,” said James Mullins, head of buyout solutions at Hymans Robertson, in a statement accompanying the report.
“Rather than sitting tight and waiting for financial conditions to improve, trustees and sponsoring employers need to take proactive steps to chip away at the problem and capture opportunities to reduce risk in stages. Buy-ins are a key to this,” he added.
Mr. Mullins said there are “clear advantages” to approaching self-sufficiency by conducting a series of buy-ins, rather than a complete buyout of the fund liabilities. “Not least that when we reach the point that demand to transact buy-ins outstrips supply from insurance companies, insurers will inevitably offer better pricing to the pension schemes that have already completed a buy-in,” he said. The report said these pension funds would already have demonstrated their keenness to transact and, understanding of the process, and will have shown they have the governance in place to make effective decisions in that area.
“With the added uncertainty and volatility that has emerged from the decision to leave the EU, we predict this will accelerate scheme derisking strategies, moving schemes further along the road to becoming more resilient to risk.”
Mr. Mullins was unavailable to comment further by press time.