John Baines, Head of bulk annuities @ Aon
It is expected that UK bulk annuity market business placed in 2021 will be around £30bn. On the face of it, given a similar amount in 2020 (£32.0bn) and a much larger volume in 2019 (around £43.8bn), that figure may seem unremarkable. But, as usual, we need to get into the detail to get a full understanding of the trends.
In 2019, the bulk annuity market was dominated by large buyout transactions. Indeed, excluding the largest deals (those over £3.5bn) the market activity was about £27bn, which is broadly consistent with 2020 and 2021 expectations.
It is clear that a few large buyout deals can have a big impact on market activity and affect many other schemes exploring risk settlement. However, there were far fewer large buyouts in 2020. This can be seen when looking at the average deal size, which was £292m in 2019 but fell to £225m in 2020.
What was the reason for this and is it expected to continue?
The main theme of 2020 was, of course, the COVID-19 global pandemic. The shock to the global economy caused concern for almost all businesses. Many of the companies sponsoring pension schemes exploring risk settlement options elected to put those projects on the back-burner, and instead focused on critical business operations. Similarly, many trustees had to change tack, considering covenant assessment and the longer-term viability of their sponsor's business.
These ‘bandwidth' issues mean that bulk annuity transactions in 2020 tended to be smaller pensioner buy-ins. These were usually those without the need for significant trustee and sponsor interaction where additional funding requirements needed to be considered. Even then, many of the successful deals in 2020 were for repeat buyers, where trustees had existing transaction governance in place to meet the operational challenges presented that year (for example, running multi-faceted projects under lockdown restrictions). These schemes were in prime position to capitalise on some exceptional pricing opportunities presented by the volatility in financial markets.
Buyout trends in 2021 and beyond
While the UK bulk annuity market volume in 2021 is expected to be about £30bn, it has been a year of two halves. The first half of the year saw £7.7bn of transactions written. In contrast over £20bn of business is expected in the second half of the year; this level of activity is more consistent with the record-breaking year of 2019.
It has taken until mid-2021 for many schemes to break free from the shackles of the economic downturn and to be able to dedicate resource to removing pension risk. The greater market activity in the second half of 2021 is expected to continue into 2022. This assumes that market conditions remain supportive, and that insurers continue to find the asset opportunities to deliver attractive pricing.
For many schemes, buyout affordability has improved significantly in the past few years. Key drivers have been investment performance, sponsor funding, member options projects and the maturing of closed schemes. These trends have continued, so while the pandemic may have subdued activity, there remains strong demand to transfer pension liabilities to bulk annuity insurers. And there is an expanding market, with growing capacity (asset capacity, reinsurance capacity and people capacity) to meet this demand.
Aon's Global Pension Risk Survey monitors the ‘endgame' target for defined benefit pension schemes in the UK. The 2021 survey revealed, for the first time, that buyout has become the preferred long-term ambition. This increased focus on buyout, combined with growing insurer capacity, suggests that 2022 could be the first year where more than £50bn of bulk annuity transactions are placed. This would be a significant milestone, highlighting the UK's strategic importance in the global risk settlement markets.
Preparing for an auction
While the bulk annuity market is set to grow, a major concern for many schemes is whether it will expand fast enough to meet the surge in demand.
Some insurers focus their attention on the largest transactions. While larger deals often dominate headlines, in our experience smaller schemes which have a clear line of sight to a successful outcome can be equally, if not more, attractive to insurers. Schemes which can demonstrate they have prepared fully for a transaction (such as removing any funding barriers, resolving any benefit issues, presenting clean membership data) will get better engagement from the market, and ultimately better outcomes, than unprepared schemes.
One of the most important aspects of preparedness is a scheme's data. There are higher data requirements associated with a buyout (where the insurer needs all the information to be able to calculate and pay benefits in future, often when the trustee has been wound-up) than for ongoing administration (where historic data and documentation may remain accessible and can be used to determine benefits on an ‘as needed' basis).
An increasing trend we are seeing is for schemes to complete more phases of data cleansing work before approaching the insurance market. As schemes more and more vie for insurers' attention, we expect this to become a common theme for bulk annuity transactions in 2022 and beyond.
