Margaret deValois :  “Why buyout may not be an option for small DB pension schemes”

Buyout is the long-term objective for many UK Defined Benefit (DB) pension schemes which want to remove the risks associated with running their scheme. With almost three quarters of these schemes being “small” however, is buyout just an option for a small segment of the market, or a realistic option for all, including small schemes as well as large?

New research from Aon, highlights that nearly half (47 per cent) of UK DB pension schemes are targeting buyout as their long-term target, whilst 34 per cent are targeting self-sufficiency.

AON says there is a marked increase in the proportion of schemes targeting buyout in previous years and for the first time since the launch of Aon’s Global Pension Risk Survey  they say that more schemes have targeted buyout over self-sufficiency.

There are currently eight players in the buyout market, of which only four will carry out a full buyout of all liabilities for small schemes under £100m.  We also have anecdotal evidence that some small schemes keen to achieve a buy-out have failed to obtain quotes from the market.  So, is buyout really an option for small schemes?

According to Barnet Waddingham, the average buyout deal size in 2019 was £288m. Again this shows that smaller schemes may be being overlooked. With figures from the 2020 edition of The Purple Book highlighting that 72% of schemes have less than £100m of assets, this means that over 3,870 small pension schemes could currently have limited access to the buyout market, unless they have pensioners only or use an alternative route, such as joining a consolidator with a buyout end game.

Consolidating through a scheme like Stoneport, enables small schemes to join together with others to benefit from economies of scale, reduced running costs, improved governance and better investment opportunities amongst other benefits.  With a buyout target of 2045, when  Stoneport plans to go to the market itself, this setup allows small schemes to access a buyout type solution without the hassle of seeking a quote themselves.

So, maybe it is time to rethink the endgame solution.