Pension schemes should typically avoid buy-in transactions when targeting a buyout within three years, as it is likely to divert governance time and cost that could be better deployed elsewhere, according to Aon.

The provider stated that, in its experience, focusing time on reducing risks within the portfolio, planning strategy and selling any illiquid assets can reduce the time to buyout by up to 18 months.

It noted that the proportion of its clients setting a long-term target of buyout had increased from 27 per cent in 2017 to 35 per cent in 2019.

Portfolios that benefit from a buy-in tend to have large holdings of gilts, investment grade credit or follow liability-driven investment (LDI) strategies with low levels of leverage, Aon added.

The provider’s To buy-in or not to buy-in? paper said this was because the transaction was most useful for pension schemes that only required the delivery of a low return from their investment strategy, with schemes made up from these components likely to be well-funded.

Aon said key considerations when considering the optimal size of a buy-in were whether there was enough capital to retain a flexible investment strategy and whether the scheme could generate sufficient return in the residual portfolio to meet funding objectives.

When preparing scheme assets for a buy-in, Aon recommended minimising volatility by hedging interest rate and inflation risk, reducing growth assets, and considering allocation to corporate bonds.

Trustees should also seek to minimise transaction risk by assessing liquidity and manage complex assets by planning for the divestment of illiquid assets, reducing complexity in LDI portfolios and improving credit quality.

Buy-ins were deemed to be most appropriate when a scheme focused on generating income had a low required rate of return on investment, with Aon recommending that trustees seek advice at the earliest opportunity after the decision has been made to pursue a buy-in.

Aon partner, Lucy Barron, said: “Buy-ins offer the opportunity for pension schemes to transfer a portion of their liability risk to an insurance company for a fixed cost - and they have become an increasingly established part of the UK pensions scene.

“At Aon, we have seen a growing number of clients setting a long-term target of buyout and while the market has been somewhat affected by the wider economic scene this year, it is still operating at healthy levels.

“Nevertheless, there are all sorts of a variables that can affect a scheme’s suitability and readiness to buy-in - everything from the level of investment return, to the state of scheme data and the relative liquidity of its investments.”

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