Insurers’ £360bn pension plan bonanza could spark government bonds sell-off
Private sector defined benefit pension plans could transfer up to £360bn of assets to insurers over the next five years, sparking a £100bn sell-off of government bonds.
According to new analysis by LCP, the actuaries, there has been a “seismic shift” in defined benefit pension schemes seeking to transfer to insurers, with an increase of more than 50 per cent in the number of schemes approaching insurers for buy-in/out quotations compared with a year earlier.
Already this year £21.2bn of assets has been transferred to insurers, which LCP says puts it on track to exceed the previous record of £43.8bn of buy-in/outs in 2019.
LCP’s analysis projects that a further 1,250 schemes will reach full funding on buy-out within the next five years.
However, as a result of this shift there will be a roughly £100bn sell-off in government bonds.
Pension schemes hold around half their assets in government bonds, whereas insurers typically only hold 10-35 per cent in gilts with the rest of their assets invested in corporate debt and other long-term debt assets. Consequently, the transfer from schemes to insurers will result in a net sell-off in government bond holdings.
Legal & General, the biggest player in pension fund buyouts last year, has only 10 per cent of its annuity book backed by gilts and other sovereign debt.
Charlie Finch, a partner at LCP, said: “We estimate that insurers could receive up to £360bn of assets from defined benefit pension schemes over the next five years and because they hold less gilts than schemes, we would expect this to result in a sell-off of around £100bn of gilts”.
“This could put pressure on the gilts market and lift the cost of government borrowing,” Finch warned.