Transfers out of defined benefit schemes by individual members could be removing more than £10bn a year of DB liability, according to JLT Employee Benefits.
According to the Buyout Market Watch Report Year end 2017, transfer volumes now rival bulk annuity volumes, which hit approximately £12.5bn in 2017, and according to JLT Employee Benefit head of buyout, Harry Harper, the former is driving the latter.
The growth has been driven by pensions freedoms, as individual members over the age of 55 look to transfer to defined contribution schemes in order to access cash lump-sums and draw-downs.
The report stated that, as an example, JLT’s administration teams are now paying out £100m per month in transfer values, up from £10m per month just 4 years ago. If we extrapolate this across the industry then it is clear that individual member transfers are now removing more than £10bn a year of DB liability.
Harper said: “It’s amazing how the volume of individual member transfers has taken off since the freedom of choice came in and now it appears to be coming up to about £10bn, as big as the bulk annuity market.
“As people transfer out to DC it actually makes a bulk annuity more viable, so the DC transfers will actually help drive the bulk annuity market as well. It’s also a possibility that the individual transfers will become bigger than the bulk annuity market, I don’t think this will happen this year because there seems to be a few big deals coming up but perhaps the year after."
The report added that if members continue to go down this route then many pension schemes will be able to achieve a cost effective buyout.
"Last year was the first year since the turn of the century that there has been some good news on the funding front, so although funding levels have only picked up a little bit, in every previous year companies have just thrown money at the pension scheme and every single year the deficits have stayed exactly where they were and it only takes a small chink of light", Harper added.
The report predicted that bulk annuity ‘monster’ transactions are set to return in 2018, estimating that the figure could surpass £30bn over the year, as “quite a few multi-billion pound quotation requests have recently been sent out to market”, JLT Employee Benefits said.
Earlier this month Willis Towers Watson warned that pension schemes will need to pay close attention to their cash outflows as DB transfers are set to continue in 2018.
According to the firm, schemes will need to monitor their portfolios closely “to avoid an imbalance that would impact their risk or growth profile”.