There is no doubt that 2023 has brought significant developments to the UK pension landscape, particularly when it comes to defined benefit (DB) pension schemes and buy-outs. Rising gilt yields, changing insurer dynamics and evolving market trends are all contributing to the ever-changing environment that is forcing many pension scheme stakeholders to re-think their strategy.
So, what are these key notable trends that have emerged so far this year and what have been the main implications for DB pension schemes and their members?
One key factor impacting the pension market in 2023 is the further rise in gilt yields since the start of the year. Gilt yields have climbed to levels similar to those seen during the fallout following the mini-budget crisis in Autumn 2022. As the affordability of buy-out options has increased, numerous schemes are now considering this route as a viable solution.
Insurers too have been affected by these changes. The latest analysis shows the Covid-19 pandemic has continued to cause previously unexpected excess deaths in post-vaccination years, resulting in improvements to overall pricing.
We forecast transactions could reach between £50-60bn in 2023, beating the record of £43.8bn worth of deals completed in 2019. This is even more impressive as schemes in general are much smaller in size when compared with 2019. We expect there to be in the region of 220 transactions, signifying a third consecutive year of growth. Insurers should be applauded for streamlining their processes to accommodate more transactions, along with the ability to facilitate larger deals.
The prevailing trends in the market are leaning towards full scheme buy-outs, with less of a focus on pensioner-only buy-ins, although insurers do like these deals as they complement the asset profile they hold. Additionally, larger deals are becoming more commonplace, with an influx of schemes carrying liabilities exceeding £1bn coming to the market.
The largest deal to date in 2023 saw the completion of the Sal Pension Scheme & Royal Insurance Group Pension Scheme’s full scheme buy-in with PIC, securing a staggering £6.5bn of liabilities. This is the largest completed deal in history and sets the stage for even larger value transactions in the near future.
Buck expects schemes in excess of £30bn to come to market, which in turn will take a significant amount of insurer resource off the table.
The number of options available to schemes looks to be increasing. M&G has made a soft re-entry into the risk transfer market, which has further diversified the available insurer options for DB pension schemes.
With nine insurers now available to provide quotes for buy-ins and buy-outs, competition is improving, offering pension scheme stakeholders more options for DB pension schemes.
While the market expansion is promising, small schemes are feeling the pinch of a resource squeeze. Fewer insurers are willing to provide quotes for these schemes, and those that do often demand exclusivity.
Many trustees and DB sponsors now find themselves grappling with the tricky decision of whether or not to enter exclusivity agreements – as they remain uncertain of the terms they will receive and when the insurer will fit them in.
In a recent Buck survey, 70 per cent of the audience said they would rather risk going to market and securing interest from more than one insurer instead of entering exclusivity agreements with guaranteed insurers.
While gilt yields are higher and forecasted life expectancy is favourable for the absolute cost of a buy-out, terms are not currently as good as in Q3 and Q4 of 2022 on a relative basis – meaning it is actually relatively more expensive for schemes to transact if they have been hedged against buy-out pricing over 2023. This is partly due to a reduction in credit spreads which drive insurer pricing. Schemes should be careful to understand the terms they are entering into and whether they are acceptable.
2023 has no doubt been a transformative period for the UK pension market. In the face of these evolving market dynamics, DB scheme stakeholders must remain vigilant and well-informed on how to navigate these new challenges.
Schemes must ensure their advisers are in tune with all aspects of what is an ever-changing market so that the right decisions are made for members.
