Over the last couple of weeks I’ve been analysing data from two surveys focused on our clients’ views on ‘endgames’ for their pension schemes.
Firstly, I’ve been lucky to get a sneak preview of the results of our 2020 Emerging Trends in DB Pensions Survey – which will be published shortly.
Key highlights for me included:
- Completing a buy-in, buyout or longevity swap is a top three priority for our clients over the next 3 years.
- 5% more of our clients (2020 survey: 39%, 2019 survey: 34%) are now aiming for buyout rather than runoff.
- 40% of schemes say they are likely to do a bulk annuity or longevity swap transaction (or both) in the next 3 years – just over half of these have completed a transaction in the past.
Whilst falls in equity markets and gilt yields during 2020 have pushed back the timelines for undertaking a transaction for some schemes, it’s clear that more and more pension scheme trustees and sponsors are focusing on de-risking. This is perhaps unsurprising given the ups and downs of 2020 – and will mean the bulk annuity and longevity swap markets will continue to be very busy.
The other data I’ve been analysing is the polling results from the Transactions and Superfunds session at our recent Pensions and Savings Virtual Conference series. These questions focused on superfunds, given they are relatively new to the DB market.
One of the questions was: ‘Have you discussed superfunds as a potential option for your own scheme?’. I was pleased to find that 20% of attendees had already actively discussed superfunds and a further 19% are planning to do so shortly. These are impressive statistics given how new the market is and the various competing demands on pension schemes’ time at the moment.
Another question asked participants to consider what they’d do if their sponsor proposed a significant cash injection in exchange for moving to a superfund. As you can see from Figure 1, 25% of participants would seriously consider such an offer and a further 5% would look at it once the market is more developed. This just goes to prove that there is a strong market demand for superfunds – further reinforced by responses to a later question which showed that over 70% of respondents thought superfunds are a positive development for the pensions industry.
If your scheme employer offered to top up your scheme’s funding to 90% of buyout, subject to transferring the scheme to a superfund that promises to meet benefits in full, what would you do?
The next question for me really gets to the heart of the superfund debate – participants were asked to imagine that they were in the situation of having an insolvent employer and an underfunded pension scheme and to decide between 90% of benefits with almost 100% certainty, or 100% of benefits with less than 100% certainty. As you can see from Figure 2, the results are pretty closely matched, again proving that there is a need for superfunds, particularly for schemes with stressed employers.
If your scheme employer became insolvent and your scheme funding level was 90% of buyout, what would you do?
Finally, we also covered capital backed journey planning, where the sponsor remains in place but additional third party capital is available to support the scheme. This is even newer to the market than superfunds but clearly sparked the interest of attendees – with a third of participants wanting to hear more about how this could work for their pension scheme.
So what does all of this mean? The key takeaway for me is that we should expect a continued growth of the bulk annuity and longevity swap markets, alongside a quick growth in the superfunds market. For any pension schemes considering approaching any of these markets the key is to be well prepared – with well thought through objectives, clean data and an experienced adviser by your side.
