More U.K. trustees are finding they can afford to insure their defined benefit plan liabilities as funding levels remain high, longevity expectations have declined and insurers' fees have come down.
Consultants advising on buy-in and buyout deals said insurers' growing capacity to take on larger transactions compared with a few years ago has lured more trustees to the market with hopes of securing a buy-in while pricing remains attractive.
According to Aon PLC, the U.K. pension risk transfer market is set to break a record in 2019, reaching more than £30 billion ($38 billion). Data from consultant Hymans Robertson LLP show that deals completed in 2018 equaled £24 billion, doubling from £12.2 billion in 2017 and increasing 137% since 2016.
In the past few months, there have been several £1 billion-plus transactions:
- Rolls-Royce, Goodwood, England, insured £4.1 billion in liabilities of its £13 billion Rolls-Royce U.K. Pension Fund through a buyout with Legal & General Assurance Society in June.
- Marks and Spencer PLC, London, completed £1.4 billion of buy-ins with Pension Insurance Corp. and Phoenix Life for its £10.5 billion Marks and Spencer Pension Scheme in May.
- Commerzbank, London, insured £1.2 billion in liabilities for its Dresdner Kleinwort Pension Plan through a buy-in with PIC in April.
A combination of factors has improved insurers' position, allowing them to adjust fees. In the past, insurers shunned taking on the liabilities of deferred participants — those who stopped accruing benefits but are yet to start receiving their pension — due to higher capital requirements they faced under Solvency II regulation. Instead they focused on buy-in deals.
Through a buy-in, plan sponsors can insure a proportion of their plan's liabilities that corresponds with a set of benefits that are due to be received by retired participants. Conversely, a buyout deal includes securing the benefits of deferred as well as retired participants.
However, recent revisions of mortality figures and a growing number of participants choosing to transfer out of defined benefit into defined contribution plans boosted the certainty of outcomes for insurers. Life expectancy in the U.K. has been declining since 2014, according to World Bank data.