Britain's companies will shift sky-rocketing pension liabilities from their balance sheets this year, experts have predicted.
With defined benefit pension schemes at record year-end levels, 2017 will be year to de-risk and UK plc is keen to take advantage of the improved affordability of shifting scheme risk to the insurance, according to Willis Towers Watson (WTW).
More than £30bn of liabilities will be insured this year the research suggests – compared with £11bn in 2016 – taking the amount of liabilities insured to the highest level since 2014.
"2016 was very much a year for taking stock, with uncertainty following the UK’s EU referendum certainly subduing the overall level of activity taking place," said Shelly Beard, a director at WTW.
With the commitment for companies to ensure sufficient funds are available to pay final salary pensions to members weighing heavy on businesses, there are a number of de-risking strategies available to boards and pension scheme trustees.
Strategies include pension scheme buy-ins – where an insurance company is paid to take on some or all of the risk to meet future liabilities but the ultimate responsibility remains with the company – or buy-outs – where a pension scheme is lifted out from the corporate balance sheet and all the risk transferred to an insurance firm.
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"Relative to the preceding 18 months, the second half of 2016 saw a marked increase in the value available in the bulk annuity market," Beard added.
Consequently, providers are entering the New Year with strong pipelines and several deals expected to trade in January, and more of our clients are approaching the market than ever, so we expect 2017 to start from a very healthy position in terms of appetite and deal pipelines.
The news comes as pension experts from Mercer revealed the aggregate pension deficits of FTSE 350 firms increased threefold in 2016.
Although deficits have reduced from mid-year all-time highs, and fell by £10bn during December alone, at the end of the year the deficit stood at £137bn. This is compared with a balance of £39bn at the same time 12 months ago.
"[The deficit levels] continue to put real pressure on any risk management plans and will require trustees and corporate sponsors to work closely together to establish the right framework to monitor and manage those risks,” said Alan Baker, UK defined benefit risk leader for Mercer.
Depending on the nature and sensitivity of the pension scheme's covenant it is crucial that trustees and sponsors position themselves appropriately to deal with the key scenarios that can emerge.
Meanwhile Mercer senior consultant Le Roy van Zyl added: "Pension scheme trustees and sponsors face the New Year with significant uncertainty. Brexit is likely to move beyond a mere intention, and the effect of new leadership in the US will become clear - not to mention other major events such the French presidential elections.”