UK defined benefit pension schemes are forecasted to pay out almost one-third of a trillion pounds between 2019 and 2021, according to new research by Mercer.
Its risk transfer outlook for 2019, found that the amount will be reached from a combination of payments of premiums for annuity buy-ins/buyouts, individual member transfers, pensions and retirement lump sums.
With 2018 ranked as a record year for premiums paid to insurers for buy-ins and buyouts, Mercer predicts the market will 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.
Mercer partner, David Ellis, noted: “Better funded and increasingly mature pension schemes have taken advantage of excellent pricing from insurers in 2018. Mercer expects the buy-in and buyout 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.”
Meanwhile, DB transfers have continued to be popular; 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.
It is a result of these costs that Mercer forecasts, that, for the first time ever, nearly one-third of a trillion pounds will be paid by UK private sector DB pension schemes over a three-year period, from 2019-21.
Mercer partner, Andrew Ward, said: “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 for Work and Pensions and The Pensions Regulator’s guidance will propel discussion in this area.”