Corporate pension programs in the U.K. are increasingly looking to offload their risk to insurers as they try to insulate themselves from future market turmoil.
Pension Insurance Corporation, one of the biggest players in the U.K. market, is seeing more requests for so-called full buyouts. That's where the corporate pension program is wound up and the insurer takes on future payments to pensioners.
It's a sign of the sweeping changes in the industry after bond chaos in recent weeks sparked forced selling by some pension funds. Higher bond yields make it easier for insurers such as PIC to meet the future liabilities of pension programs, which move inversely to market rates. Analysts and insurers point to a desire from companies for their balance sheets to no longer be so exposed to market turbulence.
"We are very busy with new business requests, including from larger schemes," said Uzma Nazir, head of origination structuring at PIC, which manages £44 billion. "From a psychological perspective, the market turmoil has meant that scheme trustees, who never expected or wanted to be in the eye of the storm, are now more than ever targeting buyout as their endgame."
That adds to the fallout from the U.K.'s recent mini budget, which led Prime Minister Liz Truss to reverse course on fiscal policy before resigning this week. Markets may remain volatile until a replacement is named, and any new leader will still struggle to fix the U.K.'s economy.
"It is likely more deals may come to market," said Larissa van Deventer, an analyst at Barclays. "This is because buyer pricing is currently really attractive and also recent market volatility highlighted the downside risk in defined-benefit funds."
While pensions' average funding levels have now improved, those that incurred outsized losses during the recent turmoil through reduced hedges or forced selling may still not be in a good place to offload their programs. There are also administrative and data challenges that need to be met before buyouts can occur, and the U.K. insurance sector has limited capacity.
Still, the desire for corporations to insulate themselves from future cashflow crunches looks set to accelerate demand. It had already been expected to be a busy second half of the year for the market, with a Hymans Robertson survey of insurers projecting £25 billion of volumes.
"This has been another good lesson to plan sponsors and regulators as to why they should not be running a large financial business," said John Whitworth, a partner at Oliver Wyman. He sees the equivalent of £100 billion per year in pension fund demand for transferring risk to the insurance sector over the next decade.
