Bulk purchase annuities – what does the future hold?

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It’s fair to say that it’s been an eventful year in the bulk purchase annuity (BPA) market.

Indeed, as many as 9 in 10 defined benefit (DB) trustees say economic conditions have delivered a welcome boost to their scheme’s funding level. This has helped to create a surge in demand for de-risking solutions.

This shift in the fortunes has, at least in part, been driven by higher interest rates shrinking pension scheme liabilities more sharply than the value of their assets. But what does it all mean for trustees’ long-term objectives – and what barriers still stand in the way of their scheme’s endgame?

To find out, we spoke to 50 pension trustees managing DB schemes with assets over £100m.¹

Most trustees plan to approach an insurer about de-risking

There’s undoubtedly been a significant spike in bulk annuity activity over the last 12 months, and the market shows little sign of slowing down.

More than a third (36%) of DB trustees surveyed expect to be in a position to approach an insurer to secure a buy-in or buy-out within the next year and, on top of that, half (50%) say they’ll be ready to knock on an insurer’s door in the next one to five years.

Illiquid assets are being pulled into sharper focus

While many DB trustees believe they’re now in a financial position to accelerate their de-risking plans, illiquid assets could prove to be a stumbling block for some.

Sharply improved funding levels and the relative impact of rising interest rates on different asset classes has resulted in many schemes having a higher proportion of illiquid assets than they expected at this stage of their journey. As a result, a large number of schemes which can afford insurance are in need of a solution for their illiquid assets, which might not be suitable for paying a buy-in premium.

This is likely one of the reasons 4 in 10 (40%) of trustees say recent changes in the market environment have prompted them to reduce their scheme’s allocation to illiquid assets as a priority. A quarter (26%) also say it’s driven them to start talking to an insurer earlier than expected so they can better understand how to best manage their illiquid assets as they approach buy-out funding.

Market volatility remains a key concern

Funding improvements and the resulting increase in the number of schemes able to secure their liabilities with insurance is great news for trustees, sponsors and pension scheme members. Alongside this, half of all DB trustees say they have a clear endgame strategy in place.

However, trustees understand that the remaining journey may not be plain sailing, with market volatility being the most common concern (40%). Other potential challenges cited by trustees in reaching their endgame included issues with their investment strategy (36%), lack of sponsor engagement (32%), the new DB funding code (26%) and general preparedness for a potential buy-in or buy-out (26%).

Trustees need to be ready – and understand their options

Our research clearly shows that while many DB trustees say their scheme is now in a better funding position, there are still many factors which could impact success in achieving a buy-out endgame.

To give them the best chance of success, we believe DB trustees should focus on three key areas:

1. Improving data quality

As trustees look to engage with the insurance market, the quality of their data will come under close scrutiny. It’s vital schemes take the time to get their data into shape, focusing on the data needed to accurately price and operate members’ benefits. This will help maximise market engagement and minimise risk from the initial transaction through to buy-out and wind-up.

2. Review the appropriateness of illiquid assets as a priority

As we’ve shown, many trustees are mindful of the need to manage and monitor liquidity in their scheme, no doubt largely as a result of the LDI crisis in 2022. This is similarly important in light of a potentially shortened time horizon to buy-out. Schemes should consider how they intend to dovetail their investment strategy with their buy-out journey, and options for managing any remaining illiquids when insurance is affordable.

3. Find the right partner

There are many factors to consider in choosing a buy-out provider. In our experience, Trustees choose to partner with Standard Life because of our collaborative approach, and desire to provide bespoke and innovative solutions to meet the needs of our clients.

¹Research conducted by Censuswide on behalf of Standard Life, between 28 April 2023 – 9 May 2023, amongst 50 DB pension scheme trustees, with schemes larger than £100m.