Schemes have a lot of work to do to make sure they are ‘at the front of the queue’ for best deals with insurers warns LCP.
LCP says schemes with capacity in their investment plan that have previously transacted a buy-in can act fast to lock in pricing opportunities and extend the existing buy-in, particularly where an umbrella contract is in place so no new contract is necessary.
The funding levels of many pension plans have increased as a result of higher gilt yields, which have also reduced or eliminated buy-out deficiencies for an increasing number of schemes. According to LCP, opportunities to reduce risk are now available that weren’t a couple of months ago.
Activity levels in the de-risking market were noticeably higher in 2022 compared to the same period in 2021, even before the current spike in yields, with H1 2022 buy-in/out volumes up over 50 per cent at £12.0bn.
According to LCP, a checklist of actions that schemes should be undertaking include a review of investment strategy and hedging arrangements, putting the right governance in place for a potential de-risking transaction, preparing benefit specifications, data extracts and collection of marital information and orking through the structure including residual risks, sizing the transaction within the wider investment strategy and planning out the asset transition.
LCP partner Charlie Finch says: “If markets stabilise at current levels then many pension schemes may find themselves sitting on big funding improvements compared to even a month ago. This could lead to a bonanza for de-risking markets next year as schemes seek to lock in the good news through buy-ins and full buy-outs and potentially some of the emerging solutions such as superfunds.
“But I would warn against a knee-jerk reaction. For most schemes, there is much that they will want to do ahead of approaching insurers to lock into the attractive de-risking terms. This involves really thinking through their strategy to market so they are fully prepared, including having undertaken the necessary data and benefit work, properly considered the structure including around residual risks and having good governance structures in place. Schemes should not underestimate the importance of a well-run process that takes everyone involved on what is probably the biggest step on any scheme’s journey.”