Pension funds looking to move to buyout must be prepared to compete for limited opportunities and should also have a contingency plan in place, Aon Hewitt warns.
The consultant said there is continued demand for buyouts, with a recent survey of attendees at Aon Hewitt conference suggesting 23% of schemes currently expect to secure benefits with an insurer by 2020.
However, the firm said schemes were likely to move to buyout en masse as soon as market conditions were favourable, which would mean supply would be unable to satisfy demand.
Aon Hewitt partner Paul McGlone said: “Excluding the largest 200 or so schemes, there is well over £500bn of liability in small to medium size schemes. If 23% of those schemes plan to be fully secured by 2020 that, on average, would require £20bn of placements to insurers for each of the next eight years. That is possible, although it would mean a big step-up from the current level of activity.
“However, past experience in the buyout market has shown that it is prone to surge in demand, as schemes look to move to buyout en masse when the time and circumstances are right. This generates bursts born out of pent-up demand, and this in the past has led to bottlenecks. As a result, not everyone who is interested will get their transaction finished.”
With this expectation of how the bulk annuity market may react, Aon Hewitt is recommending that schemes pursuing a buyout do so with as much preparation in advance as possible to ensure the time taken to transact is minimised. Beyond this, schemes also need a well-considered and low risk back-up plan.
“It would be surprising if some schemes are not disappointed when they try to secure a buyout with an insurer,” McGlone added. “They will be competing for what may be limited opportunities in the market and not every scheme is going to be able to complete their buyout plan at the time that they want.
“It’s therefore imperative that schemes have a contingency plan so that they can run if needed for a number of years on a low-risk basis until the right opportunity emerges. This would mean keeping the scheme in a holding position until it can capture the opportunity to buyout when all the factors are right, but in which it doesn’t incur unnecessary investment risk or employer contributions.
“Key to this will be not only appropriate asset allocation but an efficient benefits delivery model that can ensure the scheme is ready to buyout when conditions change.”
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