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Smaller DB schemes stick with buyout option

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The trend to buyout among the UK’s smaller defined benefit (DB) schemes continues with a slew of new sub GBP100 million deals announced this month alone.

K3 Advisory, a specialist independent bulk annuity and consolidator consultancy, reported that it oversaw the completion of seven small scheme buy-ins ranging from GBP25 million to just GBP4 million in assets.

The deals were all completed within December 2023 and were undertaken with Aviva and Just, and closed out what proved to be a bumper year for bulk annuity deals.

Figures from Aon published in April 2024 reveal the UK market experienced “a stellar year in 2023”, with a record-breaking GBP49.1 billion of liabilities secured, surpassing the previous high of GBP43.8 billion set in 2019.

This includes a record 161 sub-GBP100 million transactions, challenging concerns that the already stretched insurance industry would lack the capacity and commercial imperative to service the smaller end of the DB market. 

Adam Davis, Managing Director at K3 Advisory, says: “Small schemes have historically faced some challenges to access the same competitive levels of pricing as their larger counterparts. However, that has changed, and these transactions clearly show that insurance transactions are entirely achievable options for small schemes if they’re prepared and ready.”

Access to the bulk annuity market has been made easier from smaller schemes after a number of insurers released ‘streamlined’ transaction processes which they hope will capture the estimated 800 small schemes which are more than 100 per cent funded on a buyout basis. 

PIC launched Mosaic this April, following equivalent offerings from Aviva, L&G’ and Just, which all aim to manage the pricing resource needed to write greater numbers of deals. 

Aon states: “Streamlined processes by insurers are likely to lead to increased competition, potentially improving pricing and efficiency for smaller schemes seeking bulk annuities. While these streamlined processes give more choice, it is worth noting each process is different – and this affects which insurer can offer the most appropriate solution for a particular scheme.”

And it is not just the UK’s insurers set to capitalise on DB schemes’ improved funding position.

Figures from Cerulli Associates published this month show the US pension risk transfer market has expanded significantly over the past decade, hitting record-high volume in 2023. 

According to research conducted by Cerulli in the second quarter 2023, more than two-thirds of plan sponsors (69 per cent) say they are at least somewhat likely to derisk over the next 24 months. 

Agnes Ugoji, Analyst at Cerulli, says that the focus on a DB endgame creates opportunities for asset managers.

“Those that can assist with derisking efforts, including providing advice on glidepaths, are well positioned to capture corporate DB assets. Managers with an asset-liability management strategy can support the shifting priorities for plan sponsors’ funded status gains, ensuring they reach their goals.” 


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