Rise in DB funds aiming for insurer buyout

The proportion of defined benefit (DB) pension fund trustees targeting a buyout with an insurer has increased significantly in the last five years, according to new research by consultants Willis Towers Watson.

It found that a third of DB funds are targeting a full buyout, with another 5% aiming to run off the pension fund over time with a buyout-like level of funding. This is a large rise from 2013, when only 11% of funds gave buyout as their target. Willis Towers Watson senior director of transactions, Shelly Beard, said: “Some schemes will be closer to buyout than they think. For example, because insurance pricing can be keener than the actuary’s solvency valuation, or because insurers’ life expectancy assumptions have softened since the last actuarial valuation. We have recently seen some of the most competitive buy-in and buyout pricing for a decade, particularly for pensioners. Finally, as more members retire and move to pensioner status, the buyout cost for them reduces.”

Beard added that the increased demand for securing liabilities will require an increase in supply of long-term assets carrying an illiquidity premium. “Typically, these account for 30% to 40% of the investments a buy-in provider makes to back the pension commitments it takes on. If supply does not keep pace with demand, prices could worsen slightly. To get the best prices, schemes may have to be flexible as to when they transact, being at the front of the queue when a chosen insurer can source appropriate assets.”