Industry Voice: The bulk annuity market for small schemes

Professional Pensions
clock • 3 min read

Although 2020 was a challenging year, Aon's Dave Barratt says the bulk annuity market was very resilient, with a well-functioning insurance market, large volumes of business written and 2020 finishing up as the second busiest year on record.

Market trends for smaller transactions during 2020

The bulk annuity market in 2020 saw far fewer multi-billion pound transactions than in 2019, with mid-sized and repeat buyer transactions more prominent, and with pensioner buy-ins more prevalent than full scheme buyouts.

This meant that insurer capacity was available, creating some opportunities for smaller transactions (say those below £100m) that may have struggled to generate insurer engagement and competitive pricing in 2019, when insurer capacity was stretched in what was a record-breaking year.

The market dynamic for smaller transactions was also strengthened by an increased focus on schemes doing more upfront preparation to become ‘transaction ready' and opting to use streamlined transaction processes (such as Aon's small scheme proposition Pathway) - both of which played a major role in encouraging insurers to bid in competitive processes.

As Legal & General head of pricing & execution Gavin Smith commented: "At Legal & General we support transactions right across the market, including writing 29 transactions under £100m in 2019. Our ability to quote on schemes at the smaller end of the market is critically dependent on a well-run and efficient process. Well advised schemes with clean data, flexibility on timing and a clear understanding of affordability, will be well placed to obtain a quotation."

The market for smaller bulk annuity transactions also saw a marked increase in settlement advisory appointments being put out to tender by pension schemes contemplating buy-in or buyout transactions, with fewer schemes defaulting to using incumbent advisers without at least testing the market.

What should smaller schemes be doing now to prepare?

It is important for schemes of all sizes to be well prepared before approaching the insurance market, with work often commencing years before approaching the insurers.

As part of the initial preparation, schemes should start with a review of scheme rules and prepare a benefit specification, ideally signed off by their legal adviser. As well as being good practice in making sure the scheme benefits are being administered correctly, it also provides the bedrock for data cleansing activity and helps avoid any duplication of work and cost further down the track.

It is also important to consider whether the right advisory team is in place who can help guide schemes through the process of becoming ‘buyout ready', rather than considering this at the stage of approaching the insurance market. This helps to make sure that the preparation work is being done in the right way and with the eventual goal of buy-in or buyout in mind.  

The right preparation also demonstrates to the insurers that the scheme is serious about transacting and helps mitigate new issues emerging either during a transaction or possibly worst still, after a transaction has taken place where unexpected costs may arise which haven't been budgeted for.

Outlook for 2021

2021 is set to be another strong year for the bulk annuity market and while it is too early to predict what transaction volumes might be, insurer appetite and capacity remains strong at all ends of the market, with many insurers investing in technology, staff and infrastructure to facilitate more smaller transactions.

For those smaller schemes contemplating an insurance transaction, it is more important than ever to carry out the necessary preparation work to maximise the chances of a competitive bidding process. This streamlined approach to transactions is only likely to gain momentum and prominence, and for some pension schemes, the approach taken could be the difference between a successful transaction and being left disappointed by the outcome of a market approach.

It is therefore crucial that the right preparation, the right advisory team and the right approach to the insurance market all come together to help ensure a successful outcome for pension schemes and their members.

For further information on Pathway - Aon's solution for small schemes - click here

Dave Barratt is a senior consultant at Aon


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