Healthy defined benefit (DB) pension scheme funding levels are expected to continue in 2025, Legal & General (L&G) has said, with average UK pension risk transfer (PRT) market volumes expected to reach £45bn per annum.

L&G’s inaugural Endgame Insights report, a collaboration between the asset management and institutional retirement divisions, said L&G believes most schemes will incorporate insurance into their long-term de-risking strategy and for many, moving to buyout will be a question of optimal timing.

However, L&G also noted that objectives depend on individual circumstances and therefore it does not need to be an all or nothing decision and the option remains open to run-on for a period, before buying out at a time of the trustees’ choosing.

The report also highlighted improved funding levels, noting that, after spending many years seeking to improve funding levels, the surge in bond yields since 2022 has accelerated this progress as liability values have fallen more than asset values, resulting in many schemes finding themselves better funded than ever before.

L&G suggested the average DB scheme now holds assets that could already be sufficient to meet their long-term liabilities of paying all members’ pensions in full as they fall due.

The report also found that in the first half of 2024, insurers completed £15.2bn of buy-ins and buyouts and said it expected the total market volume at the end of the year to exceed £40bn, which would be one of the largest years on record.

L&G said it also predicted that appetite for bulk annuity purchases to remain elevated in 2025 and across the next decade.

It noted that the structure and timing of large transactions, particularly those over £5bn could materially impact the total market volume in any given year.

Over the past two years, there has been a significant increase in the number of £1bn and over buy-ins and buyouts and in 2024 L&G predicted insurers would have completed a further 12 transactions of this size.

It said the number of transactions completed each year is steadily increasing, primarily driven by schemes smaller than £100m, which make up the vast majority of transactions.

It also urged trustees to understand their scheme funding level and how insurers price as they would be better equipped to take advantage of short-lived opportunities that can arise because of unpredictable market movements.

In addition to this, it said that as trustees review their investment strategies with the objective of running on to pay pensions and grow a surplus, they will need to consider whether to return value to the sponsor, provide an uplift in benefits for members or to top-up a related DB or defined contribution (DC) scheme or a combination.

L&G said it was therefore “vital” for trustees to take into account the assets, the liabilities and the sponsor covenant.

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