A total of £1trn of defined benefit (DB) pension longevity risk will be insured through de-risking transactions by the end of 2031, Hymans Robertson has predicted.

According it the firm’s 2021 Risk Transfer Report, buy-ins, buyouts and longevity swaps have insured £0.3trn of risk from DB pension schemes since 2007. This is expected to increase by £0.7trn between now and the end of 2031.

Around £180bn of the £0.3trn came through buy-ins and buyouts, while approximately £110bn was insured through longevity swaps.

Hymans Robertson estimated that around £450bn of the £0.7trn of growth up to 2031 will be driven by buy-ins and buyouts at an average of over £40bn per year.

The remainder of the increase is expected to come through longevity swaps.

Commenting on the findings, Hymans Robertson head of risk transfer, James Mullins, said: “£1trn of insurance would be equivalent to around half of the value of all gilts currently issued by the UK government or around half the value of all of the companies in the FTSE 100. 

“Indeed, with the level of growth in pension scheme buy-ins and buyouts that we are projecting, we can expect to see several insurance companies become some of the largest companies in the FTSE 100 over the next 10 years.

“Our analysis projects when each individual DB pension scheme in the UK is expected to be able to afford to insure its pension promises. These projections show that we expect demand from pension schemes for buy-ins and buyouts to average at over £40bn a year during the next decade. 

“This is due to a combination of factors such as funding requirements meaning that sponsoring employers will need to fund pension schemes to a higher level and the cost of insuring deferred member liabilities having reduced materially in recent years. These points mean that the additional money a pension scheme needs to get to buyout is less than it has been in the past. 

“This gap will reduce further as pension schemes mature, as more contributions are paid in and as investment risk is reduced further.”

Mullins added that the longevity risk associated with around 17 per cent of all DB liabilities in the UK has now been insured, up from around 1 per cent 10 years ago.

During 2020, approximately £54bn of DB pension risk was transferred to insurers, with around £30bn coming form buy-ins and buyouts, and approximately £24bn from longevity swaps, making 2020 the second-highest total on record, after 2019.

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