What’s your pension goal?
09 Feb 2017 - Estimated reading time: 5 Minutes
Our third annual trustee barometer identified that there has been a positive shift towards longer-term goal setting. In 2015 only 15% of schemes were targeting buy-out. In 2016 this figure has risen to 25%. However, our survey also shows that more are failing to put measurable plans or timeframes in place. By not doing so are trustees leaving too much to chance?
Whilst it’s encouraging to see more trustees targeting full buy-out as their end goal, it’s crucial that schemes have a measurable plan and specified timeframe in place to achieving that goal. Defined benefit pensions are a long term game. Regardless of your destination, you must have a plan in place to reach it. A buy-in, or a series of well-planned buy-ins, could help schemes reach their end goal with more certainty.
A question I get asked regularly is, why are buy-ins attractive currently? For the first time, UK DB schemes are holding over 50% of their investments in bonds, with the majority of this in ultra-low yielding government bonds. Schemes are looking for alternative ways to make their capital work harder. Buy-ins offer not only higher yields – transactions we’ve advised have resulted in scheme assets with a 33% higher yield than government bonds – but also income better suited to meet benefit cashflows whilst also offering longevity protection.
Competitive pricing in the market currently makes this an area schemes can really take advantage of. In our Risk Transfer Report, published in August 2016, we found that six of the seven insurers we surveyed were particularly keen to write large volumes of new bulk annuity business and furthermore, new entrants are expected to join this market in the coming months. But as this year’s survey results show, demand is on the increase, and we expect that times when demand outstrips supply from insurance companies will become more and more common in the future. As demand grows, those schemes that have already completed a transaction will be at the front of the queue in the eyes of the insurance companies when deciding who should be offered the best pricing.
Therefore, regardless of the destination, it’s crucial that schemes have a measurable plan and a specified timeframe for achieving their goal. By not doing so, too much is being left to chance.