There are clear signs that the DB consolidation market is accelerating, according to new analysis by actuarial consultants Lane, Clark & Peacock.
Their latest research predicts that more FTSE100 companies will look to offload their DB pension schemes in full in the next few years, thanks to their improved funding position.
LCP estimates that as many as fifteen of the UK biggest companies will be looking to sell on their DB schemes within a three year time frame.
Its report shows that five FTSE 100 companies have already either closed the DB deficit in order to facilitate a full buy-out, or are now far away from doing so. This number includes Rentokil Initial, which announces a £1.5bn full buy-out in December 2018, with surplus assets remaining.
The actuaries say this speed of this process will depend on three key factors: whether buy-out pricing remains at current levels, the future investment performance of these schemes, and whether companies can afford to continue to make significant contributions into these schemes.
LCP says if current deficit contribution levels of around £7bn per year continue, there will likely be a huge increase in FTSE 100 companies who can afford to remove their pension obligations through a full buy-out transaction.
It estimates that 15 companies will reach this position within the next three years, a further nine companies through to 2025, and a further 16 by the end of 2028. In total over the next decade, up to 40 of the FTSE 100 companies with DB pension plans are should be withinreach of a full buy-out.
LCP says these assets are likely to equate to £300bn of pension plan liabilities – just under half of the total UK liabilities for the FTSE 100.
So far, the total volume of full buy-out of FTSE 100 companies’ UK pension plans to insurers amounts to no more than £5bn out of nearly £800bn of legacy defined benefit UK pension liabilities across the FTSE 100.
The two most high-profile transactions to date have been Rentokil and Rolls-Royce, which announced a £1.1bn full buy-out in November 2017.
Since the EU referendum in 2016, the average FTSE 100 company has seen affordability for a full buy-out increase significantly, with the aggregate funding shortfall reducing by 30 per cent to around £200bn, according to LCP.
This improvement has been driven by good asset performance, falling life expectancies and strong price competition between insurers.
LCP partner Charlie Finch says: ““Our prediction of a record year for buy-ins and buy-outs on the back of improved funding positions has clearly come to pass, with total volumes exceeding £20bn in 2018. This has smashed through the previous record of £13.2bn set in 2014.
“Our projections show UK defined benefit pension plans reaching a new stage in their journeys. To date, very few FTSE 100 companies have offloaded their pension plans in full to an insurer, but an increasing number will be able to do so over the next few years. This would mark the final phase in the move away from final salary pension plans.”
He added that while market volatility – particularly int he wake of a no-deal Brexit could throw companies and trustees plans off course. But he adds. “Despite this there is a clear direction of travel. The market is showing no signs of slowing down.”