Last week saw the announcement of a record-breaking £6.5bn buy-in by the two UK DB pension schemes of RSA Insurance Group with Pension Insurance Corporation (PIC).
The deal by the Sal Pension Scheme (SALPS) and the Royal Insurance Group Pension Scheme (RIGPS) is understood to be the largest ever bulk annuity transaction from pension schemes to insurer and covered around 40,000 members.
I want to step back and consider what this transaction means for the market.
At £6.5bn, RSA's transaction is nearly 40% larger than the previous record of £4.7bn set by the full buy-in of the Telent scheme with Rothesay in summer 2019. There's no doubt it represents a big step up in transaction size.
But in many ways this simple comparison understates quite how big a step up it is. Just a year ago, the RSA transaction would have been around £10bn. The liabilities being insured now are of course the same but the dramatic rise in gilt yields over the past year has significantly lowered their value.
So, to really put the transaction in context with what's gone before, a better comparison is to consider the RSA transaction as £10bn in "old money", and you then quickly conclude that the previous £4.7bn single transaction record has not just been broken, it's been obliterated.
Even the ICI Pension Fund - the UK pension scheme with more insured through buy-ins than any other scheme and holder between 2014 and 2018 of the record largest single transaction size at £3bn - has "only" insured c£9bn across all its buy-ins over its 10-year phased buy-in programme.
Record transaction sizes for buy-in/outs over the past 10 years
Source: Lane Clark & Peacock (LCP)
Going back a little further, it is only 10 years since the entire annual buy-in/out market was less than £10bn and it was not until 2014, with ICI's ground-breaking transaction, that the market exceeded £10bn for the first time.
Chart of historic buy-in/buy-out volumes
Source: Lane Clark & Peacock (LCP)
The impact of the RSA deal on the BPA market
So, what does all this mean for the buy-in and buyout market?
Firstly, we expect to see further large transactions over the coming months. The RSA schemes are not the only ones to have benefited from rising yields and many large schemes are now seeing affordable opportunities to de-risk through buy-ins and buy-outs.
This puts the market on track to eclipse the record £43.8bn of buy-ins/outs reached in 2019, in line with our ambitious prediction at the start of the year.
Furthermore, the current run-rate puts the first half of 2023 on track to exceed the record £17.6bn of buy-ins/outs achieved in the first half of 2019. And all of this despite much higher gilt yields today.
A shift in appetite for large deals
Secondly, the RSA deal demonstrates the significant shift in appetite and capability of the insurers to write very large transactions. While some schemes have recently tested insurers' boundaries on size, a transaction the scale of RSA would have been a real challenge even only a few years ago.
Now there are several insurers willing and able to do transactions of this scale. Insurers have access to significant capital and a deep reinsurance market, combined with growth in their own asset sourcing capabilities which is key for the largest transactions.
Indeed, the biggest challenge for insurers is arguably the sheer scale of deploying billions of pounds of assets received as a single premium. While insurers will often be comfortable to retain some of the assets they receive, many will be redeployed into the portfolio designed by the insurer to support the pricing that won them the transaction. Insurers being comfortable to manage this transition in a risk-controlled and price-effective way is key to them being able to put forward attractive pricing for the biggest deals.
The knock-on impact for smaller schemes
And while all this may not seem immediately relevant for smaller schemes, this shift in the market has far-reaching consequences for them too.
It takes a huge amount of an insurer's resources to participate in a quotation process for a large transaction the size of RSA. Insurers wishing to operate in this space are having to be selective as to which other transactions they focus on.
As a result, schemes of all sizes need to think carefully about process design and the number of insurers involved. The dynamic isn't necessarily disadvantageous, it's just different - for example, insurers losing out in the final round of a large transaction risk having nothing to show for their efforts unless they can rapidly deploy the pricing elsewhere. Schemes running mid-sized transactions therefore need to be flexible around process design but such flexibility can mean they benefit from short-lived opportunities allowing them to hit their pricing hurdles.
It's vital that your de-risking adviser understands these dynamics including what large transactions are in the market when advising you on insurer selection strategy, timing and process design.
Finally, with yields continuing to rise and a healthy appetite from some corporate sponsors to put money into schemes to shift pension risk off balance sheet, we are expecting many more schemes to follow in RSA's footsteps.
For some schemes there will be a logic for running on (eg to provide discretionary increases or to fund defined contribution benefits), but for many schemes the current pension rules create an inexorable logic to move to full insurance.
As RSA demonstrates, such a goal is increasingly realistic for even the largest schemes. So in conclusion, our view is that despite the scale of RSA's new record, it's really a question of when, not if, this record is topped.
Charlie Finch is a partner in LCP's longevity de-risking practice
LCP acted as lead transaction adviser to RSA and its parent, Intact, advising on all aspects of the £6.5bn buy-in process, from viability through to execution. LCP has also advised the trustee of the ICI Pension Fund on its £9bn phased buy-in programme from 2013 to today.