Pension buy-ins and buy-outs to exceed £44bn – LCP

Occupational pensions consultancy LCP (Lane Clark & Peacock) has predicted that 2023 will be a record breaking one in the de-risking market, with record volumes of buy-ins and buy-outs, attractive pricing and new innovations emerging.

LCP said it anticipates buy-in and buy-out volumes will exceed the record £43.8 billion achieved in 2019.

“This is despite gilt yields being much higher today than in 2019, thus reducing the size of schemes and transactions.,” said LCP.

“This prediction reflects high demand for buy-ins and buy-outs following an average c15% improvement in the buy-out funding positions of DB schemes over 2022.

“On average DB schemes leapt over 5 years ahead in their journey to full buy-in/out.

“A busy market means that schemes will need to work doubly hard to get ready and ensure that insurers will want to participate in quoting for their scheme.”

LCP said the chance of a new entrant entering the buy-in/out market is the highest for some years

“Investors and other parties have long been interested in establishing a direct presence in the bulk annuity market but there has not been a new entrant since Phoenix Life (now Standard Life) in 2017,” said LCP.

“LCP predict that 2023 has the highest chance that a new entrant emerges for some years given the changing supply and demand dynamics in the market.

“If so, LCP expects that it is most likely to be an existing insurer because of the high barriers to entry.

“Even for an existing insurer there will be a considerable lead-in time as they recruit and develop capabilities.”

Charlie Finch, Partner in LCP’s de-risking practice, said: “2022 was a roller-coaster year but the average DB pension scheme starts 2023 in much better shape than a year ago.

“The record improvement in average buy-out funding levels is likely to lead to record de-risking activity in 2023 surpassing the £43.8bn of buy-ins and buy-outs in 2019.

“Alongside more transaction volumes, we expect to see a further increase in the number of large schemes using buy-ins and buy-outs rather than self-sufficiency.”

Catherine Hopper, Partner in LCP’s de-risking practice, added: “The good news brings with it a fresh challenge of deciding when, if and how to approach insurers, particularly as many DB pension schemes had not planned to be in a position to buy-in so soon.

“Schemes wishing to transact will need to ensure they have done their homework properly ahead of approaching the market and have prepared in an optimal way.

“This will be a key factor when insurers choose which transaction opportunities to prioritise with their best pricing and terms.”