Rapid change in DB market to trigger 'surge' in scheme buyouts

Written by Sophie Smith

12/04/2023

Rapid change in the UK defined benefit (DB) market is set to present a boost for major firms such as Legal & General, Aviva and Phoenix, Bloomberg Intelligence has said, predicting a "surge" in pension buyouts for 2023.

The company suggested that liability-driven investment (LDI) approaches used by some pension managers are set to be steadily abandoned as rising interest rates make their programmes appear to be better funded, enabling the transfer of all the liabilities to insurers.

Bloomberg Intelligence argued that while the extreme gilt volatility shortly after the mini-Budget was unexpected by sponsors or fund managers, a more conservative or better-funded approach could now emerge, stating that fund managers in particular would benefit from this.

It also pointed out that steadily rising interest rates and a stabilising gilt market have since set the stage for UK DB pension programmes to appear better funded, suggesting that many companies may seek to pass on these liabilities to insurance companies such as Aviva, Legal & General and Phoenix.

According to Bloomberg Intelligence, the likely limitations to this would be whether companies have good enough record-keeping for insurers to undertake the administration and their capacity to assume multiple plans in any given year.

It also pointed out that, as DB programmes move away from LDI arrangements as funding improves, this could trigger further issues for the gilt market.

However, it said that insurers that take on and run fully funded plans might start to broaden the investment portfolio, and as these programmes run off over time, the appetite for gilts will naturally fall.

Bloomberg Intelligence senior industry analyst, Kevin Ryan, stated: “A surge in pension buyouts likely in 2023 – Legal & General, Aviva and Phoenix dominate the bulk-purchase annuity market for buy-ins and buyouts in 2021, and when the 2022 numbers emerge, we expect a broadly unchanged situation.

"In 2023, it's reasonable to anticipate that volume will increase due to DB plans looking better funded.

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