The UK pensions insurance buyout market is set to grow significantly in the next five years, reaching £20bn per annum by 2020, according to a new report by KPMG. This is set to create significant opportunities for insurers to write significantly higher business volumes and for trustees to de-risk.
A pension buyout or buy-in, also known as a bulk annuity transaction, occurs when an insurer takes over responsibility from the trustees and sponsor of a pension fund for meeting the scheme’s liabilities. The benefits to trustees include a reduction of risk, potentially reduced cost and greater scheme security. Members will continue to receive benefits to which they are entitled.
According to KPMG’s 2014 Bulk Annuity Market Insights report, until very recently, the market has been relatively stable with volumes fluctuating between £5bn and £8bn since 2007. However, due to a number of market-driven factors and recent developments, principally this year’s annuity reform, the market for insurance buyouts is set for a significant boost. KPMG predicts that the market will hit £20bn per annum by 2020.
Tom Seecharan, director, pensions insurance at KPMG in the UK explained, “Ultimately the demand for bulk annuities is being driven by defined benefit schemes continuing to mature and a greater understanding of insurance transactions.
“The supply of insurance providers is increasing as both new entrants and existing insurers seek to write more business following this year’s Budget’s annuity reforms. We envisage that these market conditions will drive year-on-year increases in buyout volumes”.
Another KPMG report, Understanding Your De-Risking Options, also highlights that there are a large number of ways for pensions schemes to insure and suggests that the appetite will come from reinsurers as well as the traditional providers.
Paul Cuff, partner, pensions insurance at KPMG in the UK said, “We are seeing an increasing number of insurers seeking to write larger business volumes and positioning products aimed at making insurance more accessible and affordable to pension schemes of all sizes.
“However, as buy-out deals are irreversible commercial transactions concerning significant amounts of money, trustees and sponsors must ensure both the structure and timing of the transaction is right. Trustees and sponsors considering a buy-out as part of their de-risking strategy should conduct a feasibility study to identify the optimum insurance solutions available in the market in the context of the scheme’s circumstances.”
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