Client advice: how safe are pension buyouts?

Indeed, pensions consultancy Lane Clark & Peacock has predicted that the value of buy-in and buyout volumes could top £360bn over the next five years.

This is because the number of private sector defined benefit schemes that are fully funded – so have enough assets to cover the pension and benefits of all scheme members – has increased by 20 per cent in the last year.

In a recent study, LCP also noted a 50 per cent surge in the number of schemes approaching insurers in the past year.

If a client’s pension fund is being bought out, it is likely because the current trustees feel they will not be able to afford to meet their obligations to you.Joshua Gerstler, The Orchard Practice

In the first half of 2023, £20bn worth of pension liabilities shifted over to insurance companies – a record amount.

Business has been driven by these schemes being in the black. DB pension surpluses totalled £184bn (as of October 31), according to XPS Pensions Group’s DB:UK funding tracker.

The Pensions Regulator has published data recently, which found 25 per cent of UK corporate pension plans can now afford to consider a buyout.

Systemic risks

But while they are big business, buyouts are only conducted by a handful of large insurance companies including Aviva, Phoenix, M&G, Just and Legal & General.

In the rush to seek a buyout, or ‘de-risk’, fears are being raised over too much concentration in a limited market.

In its Vision 2030 report, published in September, the Society of Pension Professionals warned that insurance buyouts "may not always be the answer".

The SPP’s report also highlights what it claimed were “inherent risks” in so many schemes seeking the umbrella of the insurance sector. 

It says more needed to be done to support and encourage schemes to run on rather than feel they had to seek an "endgame" or buyout.

Steve Hitchiner, president of the SPP, says the suitability of a specific "endgame target" would depend on a scheme’s circumstances, but an insurance buyout was not always the answer.

The paper argues that pension schemes that were fully funded could secure their members’ retirement income without needing to rely on the pension’s sponsoring company and that meant they could stay invested.

The SPP research paper also warns that current proposals to adjust the Solvency II regulation could reduce the capital insurers are required to hold against liabilities.