More than one million DB members will have benefits provided by insurance firms

More than a million members of defined benefit (DB) pension schemes will have their pension benefits provided by insurance firms by 2017, as increasing numbers of organisations and trustees de-risk their pension liabilities using insurance, according to research by Lane, Clark and Peacock (LCP).

The fifth annual LCP Pension buy-ins, buy-outs and longevity swaps report found that 2011’s record levels of activity brought total market volumes to £40 billion, with £12.3 billion worth of business to insurers meaning that over 500,000 DB members now benefit from the protections of an insurance policy, either through a buy-in policy held by the scheme trustees or a buy-out policy in the member’s own name.

It also found that the underlying demand from pension schemes to de-risk using insurance buy-ins and buy-outs is even higher than current volumes suggest.

Clive Wellsteed, partner at LCP, said: “Pension benefits to members of DB pension schemes will be paid out over the next 50 years or more, but many schemes are de-risking over much shorter timescales, perhaps 10 or 15 years. Insurance is the natural exit route and is fundamental to most de-risking strategies.

“The challenge is to balance the benefits of reduced risk and increased security from insuring historic DB pension obligations against the cost of doing so.

“As we ourselves get older, we want lower risk and volatility in our own financial affairs. The same is true here. As pension schemes reach their autumn years, a clear strategy for reducing risk, including the use of insurance, will help the trustees, members and finance directors to all sleep easy at night.”

Charlie Finch, partner at LCP, added: “The good news is that the first step in a strategy to de-risk using insurance is a win-win. This is where schemes purchase a buy-in from an insurer covering pensions in payment.

“Not only is current pricing very competitive, but the scheme and its members enjoy dual support from the insurer and their former employer.

“Stage two in the de-risking plan might be to insure new pensioners in five years’ time, followed by the remaining members in year ten, once they are older and more affordable to insure. This provides time for the scheme’s investments to bounce back from recent lows and for the employer to pay steady cash contributions to the scheme.

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