DB pension schemes set for record payout over next three years

Defined benefit (DB) pension schemes in the UK are set to pay out almost one-third of a trillion pounds over the next three years, Mercer has predicted.

The consulting firm said that the record payout between 2019 and 2021 includes pensions and retirement lump sums as well as large numbers of active and deferred members transferring the value of their entitlement to another arrangement. In addition, Mercer anticipates a rapidly growing buy-in and buy-out market, with "unprecedented premium volumes" to be paid to insurers.

Mercer expects these payments to lead to private sector DB schemes generally being better funded with a lower risk profile.

Andrew Ward, partner at Mercer, said: "A third of a trillion pounds is a huge sum of money and shows how the UK's DB pension landscape is changing rapidly."

The volume of transfer values taken by individual DB pension savers has increased significantly in recent years.

Aggregate transfer values of around £20bn for the whole of 2018, based on figures for the first three quarters, will be significantly higher than the £3bn annual average. Mercer forecasts this trend to continue, with around £60bn of transfer values being paid over the next three years.

Such payments tend to reduce risk for the pension scheme making the payment, as well as reduce any gap between the value of the scheme's assets and the cost of buying out and winding up the scheme.

2018 has also been a record year for premiums paid to insurers for buy-ins and buy-outs, Mercer revealed, with more than £20bn of DB obligations being insured.

"Better funded and increasingly mature pension schemes have taken advantage of excellent pricing from insurers in 2018," explained David Ellis, partner at Mercer.

The company expects this market to grow again in 2019 and remain strong for the foreseeable future.

"Overall, Mercer forecasts DB schemes will pay around £90bn in premiums to insurers over the next three years," Ellis concluded.