Third of DB schemes target insurer buyout

Over a third of defined benefit schemes are aiming to land an insurer buyout deal to secure funding, it has been revealed.

Buyouts have become an increasingly popular long-term funding strategy for schemes, with 37% planning on making a buyout or a buyout-like deal within the next five years, according to new research from Willis Tower Watson.

The report shows that only 11% of surveyed trustees and pension managers had an insurer buyout as a goal in 2013, while 37% are now looking to secure liabilities. Of these, 32% said their plan was a buyout while 5% said run-off on a close-to-buyout basis.

Another 32% said run-off with minimal reliance on the sponsor, 27% said run-off managing ongoing investment risk and 3% said run-off with another strategy.

In addition, pricing for buy-ins and buyouts is at its most competitive in a decade, with keener insurance pricing and softened life expectancy assumptions, according to Willis Tower Watson’s senior director of transactions Shelly Beard.

“Alongside this, the growing demand from members for DB transfers can cut the cost to the employer of getting the remaining non-pensioner liabilities off its books. Finally, as more members retire and move to pensioner status, the buyout cost for them reduces,” she said.

Beard added that over time, increased demand for securing liabilities will require an increase in supply.

“Perhaps the biggest question mark concerns the availability of long-term assets carrying an illiquidity premium. Typically, these account for 30% to 40% of the investments a buy-in provider makes to back the pension commitments it takes on,” Beard added.

She stated that if supply does not keep pace with demand, prices could worsen slightly. Therefore, to get the best prices, schemes may have to be flexible as to when they transact, being at the front of the queue when a chosen insurer can source appropriate assets, Beard noted.

The survey also showed that long-term journey planning is the most commonly cited priority both for trustees and scheme sponsors, with 63% of trustees and 68% of pension managers listing it amongst the three most important issues for them over the next three years.

While the number of schemes with long-term plans has remained steady over the last five years, schemes in the process of developing a plan has increased from 6% to 22%, as schemes mature and are closed to new benefit accrual.

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