UK consulting firm Mercer forecasts that nearly one-third of £1 trillion will be paid by UK private sector defined benefit pension plans over the next three years due to the large volume of active and deferred members who are expected to transfer the value of their entitlement to another arrangement.
“A third of a trillion pounds is a huge sum of money and shows how the UK’s DB pension landscape is changing rapidly,” Andrew Ward, a partner at Mercer, said in a release. “There are headwinds, not least the potential for Brexit to disrupt the landscape, but the direction of travel is clear.”
Mercer said the record payout figure was due to a rapidly growing buy-in and buy-out market, where it said unprecedented premium volumes are expected to be paid to insurers. The firm said the payments will lead to private sector defined benefit plans being better funded and having lower risk profiles. This is because transfer payments for individuals who have yet to retire tend to reduce risk for the pension making the payment, as well as reduce any gap between the value of the plan’s assets, and the cost of buying out and closing the plan.
According to Mercer, the volume of transfer values taken by individual members has increased significantly in recent years. And it said 2018 has been a record year for premiums paid to insurers for buy-ins and buy-outs, with more than £20 billion of defined benefit obligations being insured. The firm forecasts the market to grow again in 2019, and “remain strong for the foreseeable future” with £60 billion of transfer values expect to be paid over the next three years.
It also said that as the UK defined benefit pension landscape matures, there is potential for an emerging pension consolidator market. But added that how this will impact the amount paid by plans depends on how the new offerings are received by plan sponsors and trustees.
“Better funded and increasingly mature pension schemes have taken advantage of excellent pricing from insurers in 2018,” said David Ellis, a partner at Mercer. “Mercer expects the buy-in and buy-out market to smash the record again in 2019 as well-organized schemes take advantage of attractive pricing from insurers.”
Mercer also forecasts defined benefit plans will pay approximately £90 billion in premiums to insurers over the next three years.