Almost one in two DB scheme sponsors want an insurer buy-out, most within the next 10 years, but consultants are urging a ‘wait and see’ approach as legislative changes could present more attractive options over the next few years.
This survey by consultants Hymans Roberston found that almost half of the scheme sponsors (45 per cent) wanting a buy-out said they were concerned that a lack of insurer capacity or interest could derail plans.
Given this, Hymans says scheme sponsors adopt a wait-and-see approach as funding levels improve, as new market solutions and the recent Mansion House reform could create better endgame options. However, rather than being optimistic about legislative changes, many sponsors said they were unsure how these solutions or government policy might impact the details of their pension strategy.
Hymans Robertson partner & head of corporate DB endgame strategy Leonard Bowman says: “Companies never seem to get a break from new pension regulation, evolving pension solutions or volatile financial markets, but it really does feel that we are in an unprecedented period of change in the pensions world.
“Rising yields and improvements in funding levels are increasing the focus on endgame strategies and it is clear there is a wide spectrum of strategies evolving. Respondents were fairly split between saying their plans will be a full buy-out of the scheme (48 per cent) or to run the scheme on (44 per cent).
“Whilst buy-out will be the right solution for many sponsors, there are concerns around the process. More than two in five say they are most concerned about a lack of insurer capacity or interest in their scheme (45 per cent), accounting implications (45 per cent) and the cost (41 per cent).”
He adds: “Although there is uncertainty as to what the pension landscape will look like over the next few years, there is also opportunity in relation to new solutions coming to market and evolving government policy incentivising run-off strategies. Companies intending to pursue an irreversible insurance buy-out transaction in the short- to medium-term may wish to consider keeping their options open, given that the Mansion House reforms could open up new value creation opportunities, such as lowering the funding bar for extracting surplus or reducing the 35 per cent tax charge on surplus refunds.”
He adds: “This is also a potential win-win situation for companies and members, whether by share of surplus solutions meaning augmentations to member benefits or sponsors re-visiting their future pension provision designs. Much will depend on future government policy.
“Companies should be taking a step back and re-evaluating their endgame strategies, to ensure it aligns with the company’s broader objectives and beliefs and also reflects the rapidly changing pension landscape.”
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