A significant increase in so-called ‘mega-transactions’ accounted for around two-thirds of the record-breaking bulk-annuity transfer volumes for 2019, Hymans Robertson analysis reveals.
In its latest risk transfer report, the consultant found that just seven of these multi-billion transactions amounted to over £24bn in 2019, which is more than total buy-in and buyout volumes during the whole of 2018 across 162 transactions. £40bn of deals have been confirmed for last year.
Furthermore, a record amount of deferred member liabilities (around £10bn) were insured during 2019.
Hymans said this is a result of improved pricing for insuring deferred members as insurers get even better at sourcing long-dated assets and are increasingly able to share the longevity risk with reinsurers. It said pension scheme funding levels have also improved with solid asset performance and recent falls in life expectancy.
However, concerns about insurer capacity to keep pace with pension scheme demand look set to continue, with insurers now much more selective about which pension schemes they provide buy-in quotations for. The report tells of one leading insurance company which declined to quote on around 50 buy-in requests, reflecting a total value of over £10 billion of business. Competitive pricing remains but the increase in demand makes it all the more important for trustees to prepare thoroughly before approaching insurers for quotations, to ensure they can clearly demonstrate why their pension scheme should be a high priority case.
Hymans Robertson partner and head of risk transfer James Mullins explained the impact of these ‘mega-transactions' on the industry. He said: "In 2019 there were 10 transactions over £1bn and five transactions over £3bn, including the largest ever buy-in and buyout. These mega-transactions inevitably receive top priority from several of the insurers, which means that smaller pension scheme transactions need to work even harder to stand out from the crowd."
Despite the rise in volumes, Mullins said trustees could still stand out from the crowd and secure deals.
He explained: "Despite the increased competition, there are a number of ways to secure excellent insurer engagement and pricing.
"These include solid preparation and analysis before starting the engagement with insurers, and being able to demonstrate to insurers that the scheme has strong governance and stakeholder support for the transaction. It is also ever more important deciding which insurers to approach and in what manner in order to maximise their engagement and optimise outcomes for the pension scheme and its members."
Mullins also noted the cost of insuring deferred members had fallen significantly over recent years - adding this trend had not been universally recognised.
He said: "Not all trustees and sponsoring employers are aware that the cost of insuring deferred member liabilities has materially reduced in recent years. Pension schemes need to make sure they have access to a well-informed and realistic view of the cost of buying out, to avoid missing out on opportunities to insure risk much earlier than they may have believed was possible."
The number of defined benefit (DB) scheme members with benefits protected by an insurer will double by the middle of the decade, according to Lane Clark & Peacock (LCP).
Aviva Life & Pensions has concluded an £875m buy-in with its own staff pension scheme, following on from a similar transaction last year.
Just Group has completed a £74m pensioner buy-in with the UK pension scheme of a US-listed engineering business.
The Smiths Industries Pension Scheme has secured a £146m buy-in with Canada Life in its fourth bulk annuity and its sponsor’s tenth overall.
The Prudential Staff Pension Scheme has entered into a £3.7bn longevity swap with Pacific Life Re, insuring the longevity risk of over 20,000 pensioners.