Up to £650bn of buy-ins and buyouts could be seen over the next decade amid a wave of demand in the UK pensions de-risking market, LCP has estimated, urging pension schemes to “grasp the nettle” and create practical strategic plans for reaching their end goal.

Research from the firm predicted an annual volume of £30-50bn over the period to 2025, with the potential for “significantly” higher volumes beyond 2025 as large schemes approach full funding on a buyout basis.

However, the research also showed that fewer than 30 per cent of UK DB schemes over £1bn have taken their first longevity de-risking step, with LCP emphasising that there remains "considerable work" for schemes to do given the majority expect to reach their long-term objective over the next decade.

Furthermore, whilst LCP suggested that continued improvements and maturing schemes were expected to drive a wave of demand, it warned that there could be a further change of mindset from company boards towards de-risking, particularly amid the introduction of longer-term funding obligations in the Pensions Act 2021.

LCP also suggested that insurers becoming increasingly selective over the next decade will be one of the biggest risks facing schemes seeking to buyout, and will impact prices and terms, suggesting that trustees should reflect this dynamic in their strategic planning.

In addition to this, the firm encouraged trustees to put a practical plan in place to reach their long-term target, and to consider an an initial buy-in to get their “foot in the door” and put them in a stronger position as the market gets busier.

Indeed, the research showed that large pension schemes are increasingly looking to embark upon phased de-risking strategies through buy-ins and longevity swaps, as a way of reaching full buyout over time, with only one in four transactions over £100m in 2020 full buyout deals for schemes that had not previously completed a buy-in or longevity swap.

Smaller schemes, meanwhile, are facing challenges obtaining insurer engagement to provide competitive pricing and terms, with the share of the market relating to transactions below £100m shrinking from 85 per cent to 55 per cent in the past five years.

LCP partner and co-author of the report, Charlie Finch, commented: “Our analysis shows that on current trajectories the de-risking market is set to continue to be very busy, and to pick up significantly over coming years.

“The increasing legislative burden such as the new criminal sanctions in the Pensions Act 2021 could usher in a further change in mindsets as large schemes and their sponsors re-evaluate their long-term destination leading to a step change in market activity.

“Now is the time for pension schemes to grasp the nettle and put in place a clear, actionable plan for achieving their long-term objective, whether that be buyout, self-sufficiency or a DB superfund.”

LCP partner and co-author of the report, Imogen Cothay, added: “Regardless of a scheme’s end-goal, all should be considering the merits of progressively removing risk over time (through phased buy-ins, longevity swaps or alternative de-risking options) as part of their long-term strategy.

"Like with any investment, phasing over time can help smooth pricing fluctuations and reduce the risk to the end goal.”

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