DB PENSIONS TO PAY OUT 1/3 OF A TRILLION POUNDS BY 2021
1. Defined benefit (DB) pension schemes in the UK are set to pay out almost one-third of a trillion pounds over a three-year period for the first time ever, Mercer has predicted.
2. The consultancy firm said the record figures between 2019 and 2021 will be due to a large number of active and deferred members transferring the value of their entitlement to another arrangement.
3. A rapidly growing buy-in and buy-out market is also expected to be responsible, with Mercer forecasting “unprecedented premium volumes” to be paid to insurers.
4. The firm predicts the result of these payments to lead to aggregate private sector DB schemes being better funded with a lower risk profile.
5. There is potential for an emerging consolidator market – how this will impact the amount paid by DB schemes depends on how new offerings are received by scheme sponsors and trustees.
6. 2018 has been a record year for premiums paid to insurers for buy-ins and buy-outs, with more than £20bn of DB obligations insured, and that 2019 should be similar.
7. The firm revealed that many transactions in this market are strictly scheme investments, but tend to be irreversible in nature, so are included in the overall amount paid by schemes.
8. Better funded and increasingly mature pension schemes have taken advantage of excellent pricing from insurers in 2018. Mercer expects the buy-in and buy-out market to smash the record again in 2019 as well-organised schemes take advantage of attractive pricing from insurers.
9. The firm also highlighted how aggregate transfer values of around £20bn for the whole of 2018, based on data for the first three quarters, will be far more than the £3bn annual average.
DB PENSION SCHEME CONSOLIDATION SET TO BECOME 'COMMONPLACE'
1. More than half of pension professionals in the UK believe superfunds will become an increasingly common solution for defined benefit (DB) schemes, a survey has found.
2. The research from Lincoln Pensions shows that 52% of the respondents expect consolidation to become more frequent, although just 11% are willing to be early adopters.
3. However, 27% of schemes think they will meet their ‘end-game’ funding targets within five years, which would prohibit them entering a superfund under new rules proposed by the government.
4. The research shows that 60% of pension professionals believe that superfund regulation should focus on ensuring the covenant is stronger than that of the transferring scheme.
5. However, only 14% appear to support the government’s proposed regulatory approach, which Lincoln Pensions said only targets a minimum probability of success.
6. The new regulatory regime must be tough enough to improve outcomes, but not so restrictive that it prevents superfunds from flourishing. It involves estimating buyout pricing, as buyout will need to be at least five years away. Schemes wanting a superfund solution will need to make sure they are transferring correct benefits to the superfund – it’s never too early to spring clean the legal and data benefit details.
PENSION FUNDS SUFFER BIGGEST LOSSES SINCE FINANCIAL CRASH
1. The average UK pension fund experienced its biggest loss since the financial crash last year, with less than one in ten generating positive investment returns. Just 9% of funds recorded positive investment returns for the year, with the report citing widespread economic and political uncertainty as one of the main reasons. Average annual pension fund returns fell by 6.2% in 2018 following a 7.3% decline in the final quarter.
2. “The extent of the losses, combined with the return of greater volatility, raises the question as to whether savers and drawdown investors will reduce their exposure to stock markets.”
3. The data shows that UK Smaller Companies, Europe including UK Equities, and Europe excluding Equities, recorded average returns of -13.9%, -13.6% and -12.1% respectively last year.
4. These were the worst performing ABI pension fund sectors, while Global Emerging Markets, Commodity/Energy, Japan and UK All Companies also suffered double-digit losses.
5. The other threat posed by falling pension fund returns is that it could undermine efforts to encourage greater personal pension contributions
(Source: theactuary)
