More schemes choosing buyouts over self-sufficiency, Aon finds

The insurer’s Global Pension Risk Survey for 2021-22 found nearly half (47 per cent) of its UK respondents have selected buyouts as their long-term target. 

This is a continuation of a trend over the past eight years, with the popularity of buyouts more than doubling in that time. 

The popularity of self-sufficiency among pension schemes has fallen concurrently, and for the first time has been surpassed by buyouts.

In the latest survey, 34 per cent of UK respondents identified self-sufficiency as their long-term funding target, with this having fallen from 54 per cent in the 2019 research. 

Funding levels in UK pensions have normalised since the beginning of the Covid-19 pandemic, with the report noting trustees were opting for buyouts after this “period of reflection”. This trend may bring stress in time, Aon said.

With timescales to reach long-term targets continuing to shorten — to 8.8 years in 2021 from a peak of 12.8 years in 2013 — as buyouts become more popular, Aon expects this to force change in the insurer market.

Alastair McIntosh, Aon partner, said: “While buyout is now the preferred endgame for schemes, it is not without complications. What this year’s data clearly shows is that before the end of the 2020s, the average pension scheme will have reached its long-term target. Inevitably, this will put pressure on an already busy insurance market.

“However, this should not be a cause for concern. We have seen how resilient the bulk annuity market has been in the past five years, with annual transaction volumes more than tripling.

“With a carefully considered strategy and good planning in place, schemes will still be able to access attractive pricing and terms,” he added.

For schemes still aiming to reach long-term funding targets without resorting to buyouts, more than half (54 per cent) of respondents confirmed they were planning to rely on asset performance to do this. 

This was predominantly the case for schemes with more than £1bn in assets under management, with 78 per cent of respondents from schemes of this size identifying asset performance as their main source of funding. 

Of this cohort, a third said they would have to increase their maturity to make long-term targets easier to reach.

The rate of schemes requiring additional contributions was down from the 2019 survey but still made up nearly a quarter of all responses.

In Aon’s survey, 24 per cent of respondents admitted their schemes would require additional contributions beyond the agreed funding plan — down from 46 per cent of respondents in 2019.

Schemes of less than £100m in size are three times more likely than larger schemes, of more than £1bn, to require additional contributions. This was according to response rates of 37 per cent and 13 per cent, respectively.