More than a third (35 per cent) of FTSE 350 defined benefit (DB) pension schemes are estimated to be fully funded on a buyout basis, with a further 20 per cent set to reach full funding on a buyout basis over the next three years, Barnett Waddingham has found.

The research showed that the 35 per cent of FTSE 350 DB schemes estimated to be fully funded on a buyout basis at 31 May 2024 represented liability values of around £175bn, which is over three times the bulk annuity business written in 2023 (£49bn).

While Barnett Wadingham acknowledged that not all of these schemes will currently be in a position to transact, it highlighted the figures as demonstration of the potential scale of the demand for bulk annuity transactions over the coming years.

It also pointed out that the bulk annuity insurance market is growing though, thanks to existing participants expanding their new business aspirations, and new entrants to the market, with further new entrants waiting in the wings.

Indeed, the group pointed out that the past 18 months has already seen "significant" innovation in the risk transfer space for transactions of all sizes to help schemes access the market, and insurers be able to deal with heightened demand, suggesting that conrtinued innovation could help the market meet a further surge in demand.

However, Barnett Waddingham warned that meeting the potential growth in demand will still represent a "significant challenge" given asset sourcing, human resource and other constraints.

Given this, it said that schemes and sponsors may need to be increasingly flexible over the form of tender process they follow, their timescales for completing a transaction and their asks of insurers.

More broadly, however, Barnett Waddingham argued that the recent DB funding improvements have raised questions about how the economic value held in UK DB schemes can best be deployed.

In particular, Barnett Waddingham said that whilst the traditional option for well-funded schemes to agree a bulk annuity deal will remain a popular option for the majority, there is a growing recognition that a bulk annuity transaction results in an irreversible flow of the economic value from the scheme, as well as members and the company, to the insurance company.

Indeed, Barnett Waddingham's analysis showed that, in the scenario that all of the FTSE 350 DB schemes transferred to the insurance market at 31 May 2024, around £125bn of economic value would be passed over to insurance companies, being the difference between insurer pricing and the best-estimate cost of providing scheme benefits over the long term.

This, it argued could be a "boon" for UK PLC, the taxman and workers alike if it was instead shared over time between members and sponsors.

Barnett Waddingham principal, Lewys Curteis, said: “The reversal in the fortunes of the UK’s DB schemes has had a seismic impact on the pension risk transfer market, and we are likely to see the demand for bulk annuity transactions stretching the resources of the insurers for some time (even with new entrants coming into the market).

“At the same time, we are seeing an increasing number of schemes assessing the potential benefits of pursuing a run-on strategy, with a view to releasing previously trapped economic value for the benefit of members and sponsoring companies.

“We would encourage companies and trustees to properly assess the benefits that could be obtained from a run-on strategy before making the irreversible decision to transfer to the insurance market.

"Given the potential for significant regulatory changes, schemes and their sponsors may wish to reappraise whether a plan to buyout at the earliest opportunity remains optimal.”

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