PERSPECTIVE3-5 min to read

Are we on the brink of a buyout market capacity crunch?


For some time, many pension schemes have been targeting a buyout ‘in about 10 years’. However, that 10-year target has shifted from aspirational to tangible, as schemes have matured and funding levels improved. Many schemes now have the buyout endpoint in sight.

But with over 5,000 Defined Benefit pension schemes and c. £2tn of total assets , can the annuity market cope with demand? We can consider this question in two parts. Will there be sufficient assets available to meet the expected demand? And, are industry players adequately resourced?

Whilst the volume of business could be several times bigger than we’ve seen historically, capital is unlikely to be a limiting factor. The annuity market is a profitable business, so attracting new investors to support an expanding annuity market looks achievable. It may be more challenging identifying the right assets to buy with this capital, but a challenge the insurance industry could solve. For example, the growth of equity release mortgages over the past decade has been largely driven by insurer innovation to create new sources of suitable assets. In addition, potential changes to Solvency II reserving requirements could also help broaden the range of assets available to insurers without diminishing security for members.

The resources needed to process the volume of quotation requests will pose more of a challenge. Insurers have been expanding their capacity through extensive recruitment, outsourcing some of the ‘heavy lifting’ of quotations to third parties and increased automation. But there remains work to do, to bring capacity in line with expected demand.

Schemes should therefore prepare well ahead of an anticipated transaction date to ensure they can identify opportunities as they arise and be ready to act. Schemes need to appear credible to insurers when they approach the market. Insurers are unlikely to devote scarce resources towards quoting for a scheme that still has 50% in growth assets and poor quality data!

To prepare, it is important to understand the journey ahead from an early stage. In particular, it is important to:

  • Work with buyout specialists earlier than you think

This ensures trustees understand what is required of them and allows us and our partners at K3 Advisory to build a scheme’s profile with insurers. Insurers are more likely to devote their resources to schemes they know are well-advised and prepared.

  • Have an investment portfolio that adapts throughout the journey in line with the scheme’s changing circumstances.

For example, early in the journey less liquid asset classes such as private credit might be suitable if timescales permit. But portfolios need to be highly liquid, and aligned with the type of assets held by insurers, as the point of transaction approaches.

  • Monitor progress against actual insurer pricing.

We have several schemes that have been able to de-risk and transact quickly where our real-time monitoring of insurer pricing has identified opportunities that more traditional monitoring tools would have missed.

  • Not miss your window when the time comes.

There are many actions to be completed before the transaction date in a short timeframe. For example, negotiations with the insurer, engagement with the sponsor, and reshaping the assets to the insurer’s ‘price-lock’ portfolio. A fiduciary manager can be a valuable additional governance resource to manage the asset transition. Have clean data!

After affordability, data issues are by far the biggest barrier to annuity purchases and can be time-consuming to resolve. Once clean, most data items will not need to be revisited, so schemes should do most of the work to clean data and resolve any issues early in the journey can pay dividends later in getting to the front of the queue.

Despite all of this some schemes, particularly smaller ones, may still not be able to transact exactly when they want to. Insurers may simply be incapable of turning quotes around as quickly as schemes may like. As a result, schemes may need to think in terms of a ‘buyout window’ instead of a target date and accept they may need to hold a low-risk, ‘buyout ready’ portfolio for a period. However, through careful planning and implementing some key actions early in the journey, they can make sure they are in the best possible position.

To find out how fiduciary management can help you achieve your buyout goal, read our case study: “Buying out and buying in with Schroders Solutions”.

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