SSE, the FTSE 100 energy supplier, has struck a deal to pass £1.2bn of pension liabilities to Legal & General and Pension Insurance Corporation, joining the ranks of companies that have transferred retirement business to insurers.
UK companies are increasingly looking to offload the responsibility of their traditional final salary pension plans, where an employer is on the hook for paying the retirement income of members for as long as they live.
Insurance companies have responded by offering de-risking deals, known as buy-ins and buyouts, that provide employers with an opportunity to shed some or all of their pension liabilities for a price.
In the deal announced on Thursday, Pension Insurance Corporation will assume responsibility for around £350m of pension liabilities in the Scottish Hydro-Electric and Scotia Gas Networks pension schemes, which both form part of SSE.
Legal & General will take on £800m of liabilities by providing longevity insurance — protection against the risk that SSE’s pension members live longer than expected.
“Reducing risk over time is an absolute priority for us and it is important to do this in the most cost-effective way,” said Tony Fettiplace, chairman of trustees for the Scotia Gas Networks pension scheme.
Hymans Robertson, the consultancy that acted as lead adviser on the deal, is predicting that demand from defined benefit pension schemes to complete buy-ins and buyouts will rise strongly.
Helped by the SSE deal, transactions are predicted to exceed £10bn for a third consecutive year in 2017 and then forecast to rise to around £50bn annually by 2032.
Hymans’ forecast suggests that around £700bn of defined benefit pension scheme liabilities could be passed to insurance companies over the next 15 years.
This would represent a significant loss of business for asset managers that currently serve UK pension schemes.
James Mullins, a partner at Hymans Robertson, said: “There is massive pent-up demand for pension de-risking. More and more DB scheme members are reaching retirement and drawing on their pensions, which will bring a greater focus on the benefits of transferring this liability to an insurer, rather than leaving it on the balance sheet of a company.”
Mr Mullins added that pricing for these deals was currently “very keen” due to stiff competition between eight rival insurers that dominate the market.
L&G was the most active provider in the de-risking market in 2016, completing 16 deals with combined assets of £3.3bn, followed by Scottish Widows, which completed four transfers with total assets of £1.5bn. Phoenix Life, the insurer, converted a longevity swap with its own pension scheme in a £1.2bn buy-in, the largest single de-risking transaction in 2016.
Darren Redmayne, chief executive of Lincoln Pensions, which provides covenant and insurer counterparty risk advice to pension trustees and scheme sponsors, said the pensions de-risking market would continue to expand, but at a slower rate than predicted by Hymans.
“Recent market movements have led to improvements in the funding positions of many DB pension schemes which, for some, make a buyout a more realistic possibility. But we can’t assume this will necessarily continue over the next 15 years, particularly with the uncertainty of Brexit. However, the underlying fundamentals should drive continued solid growth.
“Employers are ever more acutely aware of the risks in DB pensions and buyouts are often thought of as a kind of holy-grail solution, but for members, these deals are only as robust as the insurance company that underwrites them. De-risking activity was also predicted to expand strongly back in 2007, but we saw several buyout insurers leave the market after the financial crisis.”