Almost half of DB sponsors seeking buyout worried about insurer capacity or interest

Written by Adam Cadle

26/10/2023

Nearly half (48%) of defined benefit (DB) pension scheme sponsors have buyout as their endgame strategy, but 45% of those are worried about a lack of insurer capacity or interest, according to Hymans Robertson.

Almost all (95%) sponsors pursuing an insurance deal intended to reach buyout within 10 years, the research found.

Hymans Robertson urged companies to keep their options open for new value creation opportunities, which may come from new market solutions or the recently announced Mansion House reforms.

However, it noted that most firms were unclear about how those solutions or government policy may impact the detail of their pension strategy.

“Companies never seem to get a break from new pension regulation, evolving pension solutions or volatile financial markets, but it really does feel that we are in an unprecedented period of change in the pensions world,” commented Hymans Robertson partner & head of corporate DB endgame strategy, Leonard Bowman.

“Rising yields and improvements in funding levels are increasing the focus on endgame strategies and it is clear there is a wide spectrum of strategies evolving. Respondents were fairly split between saying their plans will be a full buyout of the scheme (48%) or to run the scheme on (44%).”

Bowman noted that while buyout may be the right solution for many sponsors, there were concerns around the process, with 45% concerned about insurer capacity or interest in their scheme, 45% worried about accounting implications and 41% concerned about the cost.

“Although there is uncertainty as to what the pension landscape will look like over the next few years, there is also opportunity in relation to new solutions coming to market and evolving government policy incentivising run-off strategies,” Bowman continued.

“Companies intending to pursue an irreversible insurance buyout transaction in the short- to medium-term may wish to consider keeping their options open, given that the Mansion House reforms could open up new value creation opportunities, such as lowering the funding bar for extracting surplus or reducing the 35% tax charge on surplus refunds.

“This is also a potential win-win situation for companies and members, whether by share of surplus solutions meaning augmentations to member benefits or sponsors re-visiting their future pension provision designs. Much will depend on future government policy.

“Companies should be taking a step back and re-evaluating their endgame strategies, to ensure it aligns with the company’s broader objectives and beliefs and also reflects the rapidly changing pension landscape.”

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