Buyouts may become more affordable for pension schemes as a result of the pensions overhaul in Budget 2014, JLT Employee Benefits has said.

JLT said that an increased capacity in the bulk annuity market is causing a downward pressure on pricing.

This is as a result of a number of bulk annuity providers that currently write significant volumes of individual annuities redistributing capital towards their bulk annuity businesses, as well as speculation of potential new entrants to the bulk annuity market.

Furthermore, if the Government does not enact legislation to prevent transfers from private sector defined benefit (DB) schemes into defined contribution (DC) arrangements, then JLT said that more members could transfer out, improving schemes' funding levels, which would then make buyouts more affordable.

The firm also said that the new £30,000 threshold for trivial commutations should ultimately reduce the number of smaller liabilities within a scheme and the costs linked to them, leading to greater affordability to bulk annuity purchases.

According to the JLT Annual Buyout Market Watch Report 2014, this year is set to be a "buoyant year" for the buyout market, and that bulk annuity volumes could potentially exceed £10bn.

Martyn Phillips, JLT Employee Benefits head of buyouts: "While the Budget 2014 is expected to reduce volumes of individual annuities written in the future, the bulk annuity market is likely to be a beneficiary and this will contribute to improving buyout affordability for schemes."

JLT said that 2013 was a strong year for the pension insurance market when the total value of pension de-risking deals reached £16.35bn.

Q1 2014 has already been labelled a "convincing start to the year" as the bulk annuity deals during this period account for over £3.9bn of liabilities, representing over 50% of the 2013 total, JLT said.

Insurers are also reporting a strong pipeline for new medically underwritten bulk annuity deals for 2014, and as all parties become more comfortable with the concept of medical underwriting, JLT said that it expects this type of buy-in to become the norm for small to medium sized schemes.

Phillips said: "Trustees and sponsors are increasingly aware of the risks and uncertainties associated with DB pension scheme liabilities and continue to see the economic value of those liabilities as the true price that must be paid. Insurers remain keen to transact and are reporting a healthy pipeline for 2014."

First published 07.05.2014

monique_simpson@wilmington.co.uk