The next decade could see up to £300bn in transfers from FTSE 100 defined benefit company pension schemes to insurers through full buyouts, according to a report.
A report published today (March 26) by Lane Clark & Peacock stated the pension buy-out market was entering "a new phase" that could see it swell from £5bn to £300bn over the next 10 years.
To date, the total volume of full buyouts from UK pension schemes of FTSE 100 companies amounts to less than £5bn, according to LCP.
But the actuarial consultancy pointed to £800bn of legacy pension liabilities among the UK’s largest companies, many of which have struggled with large deficits.
In the past two years the average FTSE 100 pension scheme has seen funding improve by 10 per cent, the report stated, driven by falling life expectancies, good asset performance and strong price competition among insurers.
Should these conditions persist, LCP predicts a significant rise in FTSE 100 companies who can afford to transfer their UK pension schemes to an insurer.
In addition, it expects up to 40 companies to reach, or be close to, fully funded on buyout within the next 10 years.
Charlie Finch, partner at LCP, said: "In the short term, the insurance market is entering a pension scheme buyout boom due to increased affordability and attractive pricing.
"We predict that £300bn of pension liabilities from the FTSE100 alone could reach full buyout funding over the next 10 years as pension plans enter the home straight towards fully securing benefits for their members.
"For those individuals who have a final salary pension, they will be increasingly likely to find that it is no longer being provided by their former employer but by an insurer such as Legal & General or Pension Insurance Corporation who took on over £15bn of pension liabilities between them last year through buy-ins and buyouts."
He added the key question was whether the market is approaching a tipping point where pension plan demand outstrips available insurance capacity as the demand for buy-ins and buyouts grows.
Steve Webb, director of policy at Royal London, said: "Defined benefit schemes are moving to a new phase as a steadily larger proportion of their membership moves into retirement and schemes are increasingly focused on de-risking.
"With DB schemes now expected to have a clear ‘end destination’ in sight, buyout will be the right answer for many.
"Employers will be keen to get the volatility of legacy DB costs off their balance sheets and will generally be supportive of moves to buyout, and an increasingly competitive buyout market – plus the option of other models such as DB consolidators – should make this more attractive."
In spite of the expected growth in transfers, the report identified a number of constraints that could impact insurers' ability to take schemes on.
For instance they may not have suitable investments available to support current pricing levels, or suitable technology and enough manpower.