LCP sees ‘net neutral’ COVID-19 effect on 2020 buy-in/out volumes

first_imgConsultancy LCP has put a £25bn (€28bn) figure on total buy-in and buy-out deals by UK defined benefit schemes this year, with partner Charlie Finch describing the effect of COVID-19 ramifications as “net overall pretty neutral”.If its prediction turns true, 2020 bulk annuity volumes would be the second largest on record, marginally ahead of the £24.2bn activity in 2018. Last year was a record year for the bulk annuity market, with nearly £44bn worth of deals.“We’re reasonably optimistic about the risk transfer market this year,” Finch told IPE.He said the consultancy estimates that around £6bn worth of deals have been completed this year so far. Pricing from insurers improved over March and early April relative to the value of Gilts, reflecting the falling price of quality corporate bonds in which insurers invest.Finch said the consultancy had identified a few different categories of pension scheme behaviour with regard to bulk annuities given the current context.“The most common approach has been a ‘proceed with caution’ strategy”Charlie Finch, partner at LCP“The most common approach has been a ‘proceed with caution’ strategy, with trustees making sure that any pre-transaction due diligence covers the resilience of the insurers’ financial strength and day-to-day operations,” he said.“A second group of trustees have accelerated processes to take advantage of pricing opportunities – some have been very attractive – and a third, smaller group has put transactions on hold, for example if their wider scheme’s funding level has fallen materially as a result of market volatility.”Asked about the impact on the risk transfer market of sponsors coming under stress as a result of the economic impact of COVID-19 confinement, Finch said there were a number of pension schemes that were worried about their sponsor and would, therefore, have a bigger appetite to derisk.Sponsors that recapitalise their business might use some of the capital coming in to offload their pension scheme, so more buyouts could come, he said.DB sponsors who unfortunately end up collapsing over the next few months would see their scheme either go to the Pension Protection Fund (PPF) or, if sufficiently well-funded, to buyout with an insurance company, Finch added.“There’ll be those PPF-plus cases, as we call them, which will come to maker, which may otherwise not have done,” he said.LCP said it was still too early to draw firm conclusions on the impact that higher COVID-19 related mortality might have on insurer pricing and pension scheme finances.“However, current projections for potential excess deaths in the UK suggest the impact will not be significant, with the bigger impact being swings in financial markets,” it said.Looking for IPE’s latest magazine? Read the digital edition here.last_img