Despite Covid-19 headwinds, buy-in and buyout demand is expected to average around £37bn a year over the next decade, Hymans Robertson has predicted.

Analysis by the firm showed that Covid-19 is unlikely to dampen pension scheme enthusiasm for buy-ins and buyouts, predicting a 'bumper decade' for risk transfer activity, with 50 per cent of schemes already set to reach buyout in the next 20 years.

Commenting on the analysis, Hymans Robertson head of risk transfer, James Mullins, clarified that whilst the Covid-19 pandemic could impact short-term demand, the significant volumes seen last year should be seen as a “new normal” rather than a one-off spike, emphasising that it is “likely that the market will continue to grow as before”.

However, he added: “2020 may offer a short-lived buyers’ market for pension schemes able to move quickly and take advantage of pricing opportunities caused by recent market volatility.”

The analysis showed that, should pricing improve such that the implied return achieved from entering into a buy-in increases by 0.2 per cent per annum, then demand could “shoot up” by 45 per cent to reach £54bn a year on average for the next decade.

This would not only be a new record yearly average, but would also see a 44 per cent increase in the number of pension schemes expected to reach full buyout.

Equally, should market conditions improve and long-term interest rates improved by 1 per cent per annum, the firm estimated average demand could increase to £63bn a year for the next decade.

It estimated that a move of this size could bring full buyout within reach for 64 per cent of pension schemes, with 6 in 7 schemes expected to transact on some form of buy-in or buyout.

Mullins continued: “We have seen material pricing improvements for buy-ins and buyouts from some insurers since mid-February 2020, as a result of the fall in prices of corporate bonds, into which insurers invest some of the buy-in premiums.

“If insurers are able to continue to replicate this exceptional pricing, a buy-in or buyout will come into reach of less well funded pension schemes, naturally increasing demand to complete these transactions.”

However, Mullins warned that “hard questions” would need to be asked about whether the bulk annuity market, in its current form, has the capacity to process the increased volumes outlined in this scenario.

“Over the longer term,” he explained, “we expect the market to return to more limited transaction capacity, relative to demand from pension schemes, meaning it is vital that pension schemes are well prepared before approaching insurers if they want to get on the front foot.”

The firm urged pension schemes to have a clear broking strategy in place, as well as a good understanding of how insurance companies “think and operate” to help them become more attractive to insurers.

Mullins concluded: “Market volatility and uncertainty caused by the recent Covid-19 outbreak has the potential to temper buy-in and buyout demand in the short term, however, over the medium to long term our analysis suggests there looks to be no wavering of appetite from DB schemes and that we are set for a bumper decade for risk transfer activity.”

“The increased pressure on pension schemes by The Pensions Regulator to formulate long term objectives offers a good opportunity for pension schemes to review their strategic journey plans.

“We believe this will increase the number of pension schemes who are actively targeting buyout and the number who end up being funded to a level whereby buy-out is within touching distance. Considering the best approach to market should form an integral part of any such strategy review.”

The firm also predicted that two-thirds of buy-in and buyout volumes over the next ten years will be driven by ‘mega-transactions’ of more than £1bn each, despite previous suggestions that there could be a decline in these.

It warned that this could make it harder for smaller pension schemes to achieve genuine engagement from insurers for “many years to come”, stating that they will need to work harder to demonstrate why they are an attractive case to the insurers.

This follows a record year for the risk transfer market in 2019, with £43.8bn worth of transactions completed.

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