Following an increase in the number of defined benefit (DB) pension scheme buyout deals in 2017 compared to 2016, and with prices steadily improving, independent financial services consultancy, Quantum Advisory, predicts this trend will continue throughout this year.
Companies with DB pension schemes will rarely want to run the scheme themselves until the last pensioner passes away due to the risk and associated liability. Instead, they will at some point arrange for an insurance company to take over paying the benefits – known as a buyout. An insurance policy will then be issued to each pension scheme member allowing the scheme to eventually wind up.
Working with a number of insurers in the market, Quantum Advisory is able to track the pricing of buyouts to give an idea of what it might cost to buyout an average pension scheme. Its most recent analysis shows a trend of falling prices over the first few months of 2018, suggesting that this option is becoming more affordable and attractive to employers.
Simon Hubbard, an actuary at Quantum Advisory, said: “Buyout pricing for many schemes is now below the cost of paying pensions by investing in typical low-risk assets, which offers some pension schemes the opportunity to reduce their long-term risk with little upfront cost. This could be an attractive option for employers who want to free up their time and cashflow to focus on their core business. As long as the market keeps going the way it is, the popularity of buyouts will only increase.”
Simon Hubbard, Actuary at Quantum