The UK buyout market is undergoing a “seismic shift”, according to analysis from LCP, which revealed a more than 50 per cent increase in the number of defined benefit (DB) schemes approaching insurers for buy-in/out quotations compared to a year earlier.

LCP's research showed that the number of UK private sector DB schemes fully funded on buyout basis has “swelled” to 20 per cent, representing 1,000 schemes and c£275bn of assets out of the £1,400bn total in UK DB schemes.

In addition to this, it projected that a further 1,250 schemes will reach full funding on buyout within the next five years, further accelerating the boom in the pension buy-in and buyout market.

As a result of this, LCP estimated that volumes of assets transferring to insurers over the next five years could reach up to £360bn, marking a "substantial uptick" on historic levels, with volumes over the past five years totalling £155bn.

Early indications of this shift can already be seen, as LCP pointed out that the first half of the year has seen a record £21.2bn of assets transferred to insurers, with the year on track to exceed the previous record of £43.8bn in 2019.

Despite capacity concerns, LCP noted that insurers have been scaling up through extra people, improved technology, extended asset sourcing and streamlined internal processes.

It also found that smaller transactions continue to be relatively well-served with several insurers allocating dedicated capacity, pointing out that despite a significant increase in quotation requests, insurer participation rates have remained relatively stable over the past two years.

However, LCP acknowledged that while pricing has remained highly competitive at all size levels, evidence shows that insurers are becoming more selective with a 20 per cent reduction in the proportion of insurers that agree to provide a quotation.

And whilst larger schemes are still well-placed to secure insurer engagement, LCP suggested that even they can no longer assume that all insurers will quote on their process, with the number of £1bn plus transactions approaching insurers increasing by 2-3 times in the first half of the year.

The segment facing the greatest challenge though, according to LCP, is the ‘squeezed middle’ – mid-sized deals of between £100m and £1bn – who haven’t benefited from the streamlining for smaller schemes and are having to compete with the many large transactions.

However, LCP noted that there are potential levers to alleviate these pressures, as M&G re-entered the market in September 2023 and further new entrants are expected over the next year, which is expected to help add much needed capacity to the market.

In addition to this, it suggested that the reforms to Solvency II coming into effect over 2023 and 2024 should increase capacity further.

The firm also acknowledged that alternatives to buyout are growing, particularly options around longer term self-sufficiency and superfunds and capital-backed journey plans.

LCP partner, Charlie Finch, stated: “There has been a seismic shift in the DB pension landscape in the past year as the number of schemes seeking to transfer to insurers has surged on the back of tumbling buyout shortfalls.

“Our analysis shows that this trend is only likely to accelerate with nearly half of the c5,000 DB schemes projected to be fully funded on buyout within 5 years.”

Adding to this, LCP partner, Imogen Cothay, stated: “Insurers are rising to this challenge, and despite short-term resourcing pressures, insurers are confident about their capacity to support record-breaking demand over the coming years.

“As activity ramps up, insurers are being more selective on which schemes they work with, but we are still seeing strong competition, even for smaller transactions.

“That being said, schemes who wish to target insurance need to be strategic in their approach.

"The balance of power in the market has shifted, and schemes need to be able to justify to insurers through targeted preparation and by agreeing a suitable route to market, why those insurers should participate in their transaction processes.”

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