Buyouts: Is a capacity crunch already here?

LCP says that the first half of the year has been extremely busy, with volumes on track to exceed H1 volumes in any previous year. 

Chris Rice, head of trustee services at Broadstone said: “Insurers that have released their mid-year results have disclosed a significant increase in premiums and/or number of deals completed compared to last year.   

“This is not unexpected given the improvement in funding across many schemes experienced last year. With rumours of ‘mega deals’ circulating, it all suggests we are looking at a record year for transactions.” 

Imogen Cothay FIA, partner, Lane Clark & Peacock LLP added: “There are a number of very large transactions coming to market in the second half of the year.  Whether volumes for 2023 as a whole end up being record-breaking will depend on the extent to which these deals close before the year-end.”  

The buy-in market has also been buoyant. Hymans Robertson analysis indicates that unprecedented demands means that pension scheme buy-in volumes could be around £25bn in the first half of 2023. 

James Mullin, head of risk transfer solutions at Hymans Robertson, said this has been due to market volatility and improving scheme funding levels in 2022 leading to a surge in transactions. He added: " We expect these high volumes to continue during the rest of this year and beyond.” 

Capacity crunch? 

The number of schemes in a position to consider a buyout has increased dramatically. 

LCP estimates that around 1,000 schemes (almost one in five) are now already fully funded on a buyout basis. 

Insurers have met demand historically and have worked hard in recent years to increase capacity in expectation of significantly higher volumes of business. 

However, experts caution that the massive rise in demand could lead to a buyout capacity crunch. 

Adolfo Aponte, managing director at Cardano Advisory, said: “Capacity in the UK DB buyout market could be challenged in 2023 with many market commentators expecting the ‘high water mark’ of £43 billion of buy-in and buyout business (which was completed in 2019) to be surpassed.” 

Rice added: “It is going to become increasingly difficult for schemes to attract attention and receive as many competitive quotes as would be ideal. While there are also rumours of new entrants in the market, there is significant work required for an insurer to start writing business, so this additional capacity is a way off. 

“Schemes wanting to buyout need to be patient, well prepared and work flexibly with their brokers and insurers to get the best result.” 

Getting buyout-ready 

As the buyout market becomes more competitive, trustees looking to do deals must make sure their scheme is as attractive as possible to insurers. 

Girish Menezes, head of administration at ISIO says: “The change in gilt rates has made buyouts  a very real opportunity for many schemes. As such, insurers are being quite selective and only engaging with schemes who are buyout-ready in terms of both liquidity of assets and quality of data.  

“Trustees should engage with all their advisors – actuary, investment consultant, lawyers and administrator - to take a realistic view of the work that needs to be taken prior to engagement with an insurer.” 

He adds that data is the single biggest barrier that schemes are facing and the problem is exacerbated by limited administration resource to address this. Trustees therefore need to plan insurance transactions well in advance with their administrators and ensure that resource is available. 

Keep your options open 

There are many reasons why buyout is often the preferred endgame for DB pension schemes. First and foremost, buyouts deliver a very high certainty of outcome and benefit security for members. 

However, in the current environment, schemes would do well to consider all their options. Even schemes that are funded on a buyout basis may struggle to do deals in the short term, particularly if they are small. 

Aponte warns that trustees need to keep an eye on costs. He says: “For many schemes, it is impossible to ignore the fact that buyout is an expensive option, particularly when compared to a DIY run-off strategy. With the market now so congested, we are also likely to see prices rise as insurers become increasingly selective in which pension schemes they transact with. Other de-risking options, such as Capital Backed Journey Plans, can be more affordable than buyout. 

“Rather than considering a buyout as a default option, we encourage pension schemes to work with their advisors to evaluate their circumstances and identify what will deliver the best solution for members. This could be a buyout, a buy-in, an alternative de-risking option or continuing to run the pension scheme on for the time being at least.” 

Read more: Pension buyouts: How safe are insurers?

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