Buy-in and buyout volumes are expected to reach a record high in 2023, with attractive pricing and continued innovation, although pension schemes may need to work harder to prepare amid the increased demand, LCP has said.

The firm predicted that buy-in and buyout volumes will this year break the £44m record set in 2019, with high demand for buy-ins and buyouts following an average around 15 per cent improvement in the buyout funding positions of defined benefit (DB) schemes over 2022.

Following on from pricing improvements seen in 2022, LCP suggested that pricing will continue to be attractive for schemes that are properly prepared, warning however that schemes will have to work “much harder” than in the past to secure active insurer participation.

Indeed, the company said that a busy market means that schemes will need to work doubly hard to get ready and ensure that insurers will want to participate in quoting of their scheme, urging schemes that wish to transact to “get their homework done” so they are transaction ready before they enter the market.

Despite the overall increase in buy-in and buyout volumes, the firm also predicted fewer partial buy-ins in 2023, with more full buy-ins and longevity swaps expected instead.

LCP explained that schemes are now operating with higher collateral levels post the “liability-driven investment (LDI) crisis” to improve resilience to future gilt yield rises, in turn meaning that there is less capacity to undertake partial buy-ins at an early stage in a scheme’s journey.

The company also stated that, for larger schemes, this may tilt the balance from using buy-ins to using longevity swaps to hedge longevity risk, clarifying however that care needs to be taken as longevity swaps themselves typically require collateral.

LCP also said that whilst the “increasingly common barrier” to full insurance, the barrier of illiquid assets, has been "exacerbated" by the LDI crisis, new innovation is expected to emerge to address this.

The company predicted this innovation will include better ability to transfer illiquid to insurers alongside innovative deferred premium structures and other disposals options that better preserve value.

More broadly, the firm suggested that 2023 has the highest chance for a new entrant entering the buy-in/buyout market for some years, given changing supply and demand dynamics in the market.

However, LCP noted that this is most likely to be an existing insurer because of the high barriers to entry, also pointing out that, even for an existing insurer, there will be a considerable lead-in time as they recruit and develop capabilities.

LCP de-risking practice partner, Charlie Finch, commented: “2022 was a roller-coaster year but the average DB pension scheme starts 2023 in much better shape than a year ago.

“The record improvement in average buy-out funding levels is likely to lead to record de-risking activity in 2023 surpassing the £43.8bn of buy-ins and buy-outs in 2019.

“Alongside more transaction volumes, we expect to see a further increase in the number of large schemes using buy-ins and buy-outs rather than self-sufficiency.

“Insurers have shown a remarkable ability to innovate and develop new solutions. This will be important as we enter a new phase of the market over 2023.”

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