Stay informed with free updates
Simply sign up to the Pensions industry myFT Digest — delivered directly to your inbox.
UK businesses are expected to offload a record £60bn of pension obligations to insurers this year, according to a new forecast, after a shift to higher interest rates prompted a surge in dealmaking.
The rise in market rates in the past few years has dramatically improved the funding levels for company pension schemes, meaning a huge swath can now make a so-called bulk annuity deal with an insurer, where they parcel off some or all of the liabilities, along with the assets backing them.
Consultancy Willis Towers Watson said it expected the “turbocharged” market to lead to £60bn worth of transactions this year, up from about £50bn transacted in 2023.
“The market has started [the year] as strongly as everyone predicted,” said Shelly Beard, the consultancy’s head of pensions transactions.
Though rates have dipped since their peak in the middle of last year, with the 10-year UK gilt yield falling back below 4 per cent, many schemes entered into derivative transactions when yields were at highs to protect their funding levels and ability to do a deal, she added.
Experts predict hundreds of billions of pounds of liabilities will transfer from company balance sheets to insurance companies as part of a multiyear shift that will redraw the UK’s retirement landscape.
Advisers, though, have more recently warned of headwinds to the market, as a forthcoming reduction in tax on accessing pension surpluses — and the prospect of new rules that might expand the circumstances under which businesses can access the surplus — improve the attractiveness of keeping a scheme on the corporate balance sheet.
“There is this challenge now whether the right endgame is an insurance contract . . . or whether it would be right for a scheme to run on,” said Natalie Winterfrost, chair of the Society of Pension Professionals investment committee, and an independent trustee.
“Certainly we now have some sponsors that are talking about running the scheme on.”
Willis’s Beard said some well-funded schemes with big employer backers such as financial firms were thinking “actually this is a very material amount of money and we probably could do something interesting [with it]”.
The government has promised to look at ways of easing companies’ access to their pension scheme surplus, and the industry is awaiting formal proposals.
These, experts said, could include allowing employers to move some of their defined benefit pension surplus into their defined contribution pension scheme, or even taking money out for the business.
The rethink for some was mostly just taking the sting out of concerns expressed last year around insurer capacity, Beard added, and should not affect the 2024 forecast.
But, she said, it might dim the rate of growth in coming years. “It is perhaps just not the exponential growth we might have thought about.”
Willis also predicts £20bn of so-called longevity market swaps in 2024, transactions whereby pension schemes hedge out the financial risk of their members living longer than expected, as part of a record £80bn year for pension “de-risking”.
Bonus season — are you headed for a payout or a doughnut?
For the third year in a row, the Financial Times is asking readers to confidentially share their 2024 bonus expectations, and whether you intend to invest, save or spend the cash. Tell us via a short survey
