Bombshell Budget 2014: Opinion divided over Budget’s impact on de-risking

“George Osborne has opened Pandora’s Box for occupational pension schemes”, Spence and Partners’ Marian Elliott told Pensions Insight.

“The impact of the announcements for defined benefit (DB) schemes depends almost entirely on the outcome of the consultation regarding the restriction of transfers between DB and DC schemes”, she said.

As part of its revolutionary plans for pension reforms, the government is consulting on whether to stop DB members leaving schemes in favour of the increased flexibility now offered to DC savers. If it decides not to introduce a transfer ban, many members may leave, Elliott predicted, adding it would “fundamentally change the risk profile, duration and therefore the investment and risk management strategy adopted by trustees”.

[Budget] may reduce the attraction of holding index-linked gilts and UK corporate bonds

Jonathan Crowther, head of UK liability driven investment at AXA Investment Managers, said this change to DB schemes’ expected run off “may reduce the attraction of holding index-linked gilts and UK corporate bonds”.

Crowther warned this “could potentially adversely impact the orderly operation of those markets as well as the operation of those schemes that are currently underfunded with consequences for sponsors and the economy as a whole”.

The bulk annuity market could also be affected as sponsors realise they can find a cheaper way to shed DB liabilities than the traditional route of buying-in or buyingout with an insurance firm, Elliott said.

Sponsors who have already twigged this opportunity may put the brakes on any bulk annuity purchase plans currently underway, she added.

PwC on the other hand predicted a buyout boom when greater competition is sparked by life insurers having new found capacity as their individual annuities businesses decline.

Ben Stone, risk transaction specialist at PwC, said the Budget reforms backed-up the firm’s prediction that 2014 will be a record year for de-risking.

We could quickly see more, and hungrier, DB buy-out market participants

“The changes to defined contribution pensions will leave insurance companies with a huge sales hole to fill and defined benefit scheme buy-outs may prove an attractive alternative for them”, he said.

“We could quickly see more, and hungrier, DB buy-out market participants. This means increased competition and better prices for pension schemes looking to buy out.”

There would be less of an impact if DB to DC transfers were blocked, the only obvious area to suffer being enhanced transfer value exercisis (ETVs) in which members are offered upfront incentives to leave DB schemes.


The ICI pension scheme record-breaking buy-in deals with L&G and Prudential, covering £3.6bn of liabilities, shows the Budget has not yet dented schemes’ healthy appetite for de-risking