Small schemes see up to 25% rise in buyout affordability

Interest rate rises have seen unhedged scheme funding positions improve dramatically

Jonathan Stapleton
clock • 2 min read
Small schemes see up to 25% rise in buyout affordability

Buyout affordability for smaller schemes has improved by as much as a quarter since the start of the year meaning increasing number of defined benefit (DB) funds now have a buyout surplus, K3 Advisory says.

The specialist bulk annuity advisory firm said while funding positions had improved for many schemes because of rising interest rates, smaller schemes had shown a much more significant improvement as they were much more likely to be unhedged than larger schemes.

K3 Advisory managing director Adam Davis said he was seeing an increasing number of buyout transactions where the trustee was left with a surplus - adding he expected a significant number of schemes were in a similar position.

But he said that, while a number of smaller schemes were likely to be "sitting in surplus of buyout" not all trustees realised they were in such a good position - noting that many relied on their scheme's triennial valuation to inform them of the latest position and adding the next valuation could be months or years away for many.

Davis urged smaller schemes to review their position and, should it have improved markedly, to consider "pressing the red button" and de-risking their investments to protect their position.

K3 Advisory expected there to be a surge of smaller schemes looking to conduct a bulk annuity transaction, but Davis said that, while there was sufficient insurer capital and reinsurer appetite for increased numbers of transactions, human resource could be a constraining factor.

He also said that any capacity crunch was likely to be felt more keenly by smaller schemes, who could find it more difficult to complete transactions.

Davis noted that deferred member liability pricing had also substantially improved over the last 12-18 months, with pricing going from well below gilts to as much as gilts plus 20 basis points. He said this would drive demand in this space going forward.

According to the Pension Protection Fund's Purple Book 2021, there are currently around 3,755 schemes with assets of less than £100m, representing some 72% of all schemes. Of these 1,485 schemes have assets of less than £10m.

Since last November, the Bank of England base rate has risen from 0.1% to 1.25%, with further increases expected over the remainder of the year.

 

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