- Due to the combined impact of premiums for annuity buy-ins / buy-outs, individual member transfers, pensions and retirement lump sums paid
- Annuity transactions and individual member transfers forecast to hit a new record in 2019 of at least £50bn
Mercer forecasts that, for the first time ever, nearly one third of a trillion pounds will be paid by UK private sector defined benefit (DB) pension schemes over a three-year period, from 2019 - 2021. The record amount is due to large numbers of active and deferred members expected to transfer the value of their entitlement to another arrangement; and a rapidly growing buy-in and buy-out market, where the forecast is for unprecedented premium volumes to be paid to insurers. Mercer expects the result of these payments to lead to private sector DB schemes in aggregate being better funded with a lower risk profile.
Andrew Ward, Partner at Mercer, commented “A third of a trillion pounds is a huge sum of money and shows how the UK’s DB pension landscape is changing rapidly. In aggregate, UK company DB schemes are expected to be better funded and bear less risk in three years’ time. There are headwinds, not least the potential for Brexit to disrupt the landscape, but the direction of travel is clear.
As the UK DB landscape further matures, there is potential for an emerging DB Consolidator market. How this will impact the amount paid by DB schemes depends on how the new offerings are received by scheme sponsors and trustees. The recent consultation announced by the Department of Work and Pensions and the Pensions Regulator’s guidance will propel discussion in this area.”
Record year for the buy-in and buy-out market
2018 has been a record year for premiums paid to insurers for buy-ins and buy-outs, with more than £20bn of DB obligations being insured. Mercer forecasts this market to grow again in 2019 and remain strong for the foreseeable future. Many transactions in this market are strictly scheme investments rather than payments out of the scheme; but they tend to be irreversible in nature and so are included in the overall amount paid by schemes.
David Ellis, Partner at Mercer, commented “Better funded and increasingly mature pension schemes have taken advantage of excellent pricing from insurers in 2018. Mercer expects the buy-in and buy-out market to smash the record again in 2019 as well-organised schemes take advantage of attractive pricing from insurers. Overall, Mercer forecasts DB schemes will pay around £90bn in premiums to insurers over the next three years.”
Transfers from DB to defined contribution (DC) arrangements
The volume of transfer values taken by individual members has increased significantly in recent years. For many years, transfer values paid each year by DB schemes in the private sector averaged around £3bn; whereas statistics covering the first three quarters of 2018 suggest that aggregate transfer values of around £20bn will be paid in 2018 overall. Mercer forecasts this trend to continue, with broadly £60bn of transfer values being paid over the next three years.
Transfer payments, paid in respect of individuals who have yet to retire, tend to reduce risk for the pension scheme making the payment, as well as reduce any gap between the value of the scheme’s assets and the cost of buying out and winding up the scheme.
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