Improved funding prompts potentially ‘record-breaking’ period for BPAs

Just over four out of five (86 per cent) defined benefit (DB) pension scheme trustees expect to approach an insurer about a buy-in or buyout within the next five years, thanks to improved scheme funding levels, according to research by Standard Life.

The survey of 50 trustees managing DB schemes with assets over £100m also showed that half (50 per cent) anticipate a step towards de-risking through a bulk purchase annuity (BPA) within five years, while over a third (36 per cent) said expected to do so within one year.

Behind the anticipated surge in de-risking activity was the fact that 92 per cent of trustees reported improved DB scheme funding, as a result of a shift in factors such as higher gilt yields and a slowdown in longevity improvements.

Indeed, the research also found that the vast majority (95 per cent) of trustees view pricing as an important factor that determines whether they choose buy-in or buyout as their endgame strategy.

“BPA deals have long been considered the gold standard when it comes to de-risking, but sufficient funding is a key factor and for many pensions schemes, a BPA deal was not in their short-term horizon, even just a year ago,” said Standard Life managing director of DB solutions and reinsurance, Kunal Sood.

“Scheme funding levels have improved to the point where BPA deals are now a near-term solution for many DB schemes.”

Sood also suggested that the changing economic landscape will lead to a bumper year for BPAs, stating: “This new funding environment has helped drive demand across the market, which is on track to meet expectations that 2023 will be a record-breaking year in terms of BPA deal volumes.

“Trustees have many factors to consider when it comes to their de-risking strategy, however, with many schemes in a strong funding position, it is unlikely the current appetite for buy-ins and buyout will slow down."

However, given this demand, Sood argued that it is "crucial" that schemes prioritise preparation and ensure they have clarity on their requirements and objectives, so that they are well prepared to maximise insurer engagement.

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