Industry Voice: A Bird's-eye view of the risk settlement market

clock • 5 min read
Martin Bird, Senior Partner & Head of Risk Settlement, Aon
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Martin Bird, Senior Partner & Head of Risk Settlement, Aon

In a year when the world attempted to return to a ‘new normal', the risk settlement market also appeared to be embarking on a new era, with Aon's Global Pension Risk Survey 2021/2 revealing that buyout is now the preferred long-term target for most schemes. 

This may come as no surprise to many of the trustee boards who have been diligently preparing their schemes in anticipation of what's to come. Revised funding plans and robust supporting governance frameworks are being carefully put in place and a watching brief on market pricing is now the new-norm in order to respond quickly to market opportunities. Indeed, many schemes were able to move quickly to capture the favourable pricing that arose during 2021, allowing them to reach their target earlier than planned.

When responding to our recent survey, all the main participants across the insurance market cited resource availability as one of the key potential headwinds they anticipate for 2022 and beyond.  However, as seen in recent years, the market has a track record of rising to the challenge of increasing volumes.  I'm sure 2022 will be no different, with many in the market expecting it to be a bumper year, and with some speculating that volumes may exceed the £50bn threshold for the first time.

Our 2021 story so far

I am hugely proud to say that 2021 has been another year marked by success for Aon's Risk Settlement Group which helped to provide de-risking solutions for a wide range of clients, securing bulk annuity transactions totalling £4.6bn in liabilities.

Highlights from some of the deals we were extremely pleased to lead on this year include:

  • Securing £900m in liabilities for Kingfisher (whose brands include B&Q and Screwfix) with Aviva; this was the third and largest bulk annuity we have advised on for this client, securing benefits for over 8,000 members in this latest transaction.
  • Supporting the Sanofi Pension Scheme in significantly reducing the scheme's risk by agreeing a £760m buy-in with Legal & General (L&G), securing the benefits of around 2,900 pensioner members.
  • Advising on a £310m full scheme buy-in with L&G for the Reuters Supplementary Pension Scheme, a highly complex transaction involving an unusual multi-currency benefit structure.

It was not just the bigger schemes having success this year. We are also very pleased to report continued strong activity at the smaller end of the market, with the team successfully supporting 19 schemes to secure sub-£100m deals. This smaller scheme trend is replicated across the market, with 65% of all deals written in first half of 2021 being under £100m, compared to 54% across the whole of 2020.

It has also been a busy year in the longevity swap market. We have helped a range of clients at various stages on longevity swap projects, covering both captive and intermediated structures. As in previous years, the swap market continues to be characterised by a relatively small number of ‘mega deals'. This means that at times it may appear that the market has ‘gone quiet', but the reality could not be further from the truth. There is much behind-the-scenes activity ongoing - and no doubt a few big announcements over the forthcoming months. Watch this space…

Finding the Pathway for smaller schemes

Our Pathway framework is specifically designed to support clients at the smaller end of the market, where a streamlined cost-effective process is essential to deliver the best outcomes.  It also helps to ensure schemes present themselves as favourably as possible when engaging with the insurance market. We have continued to work with Eversheds Sutherland LLP to offer pre-negotiated annuity contracts, allowing schemes to proceed quickly and efficiently, safe in the knowledge of enhanced commercial and legal terms already secured.

A great example of the Pathway framework is the General Motors Vauxhall Associated Companies Pension Fund (VACPF) £53m transaction with Aviva, securing the liabilities for just under 1,400 members. The deal was completed within seven working days - from the point of exclusivity to signing - and captured favourable pricing as a result of the enhanced level of preparation in the lead up to the transaction.

With a 100% conversion rate to date, we look forward to continuing to utilise the Pathway framework to support more clients in 2022 and beyond.

ESG considerations gather momentum

Amid the focus and attention on COP-26 during the year, we have also seen increasing evidence of a strong Environmental, Social and Governance (ESG) policy becoming an increasingly important factor when choosing between insurance providers, and with providers noticeably placing more focus on demonstrating their credentials.

Further information on ESG considerations can be viewed in our earlier published article Factoring ESG into Risk Decision Making.

A busy finish

 With, at the time of writing, around a month left before the holiday season starts, it might be easy to conclude (or wish…) that the market is starting to slow-down and that attention is turning to a relaxing festive break. But with many projects in their final stages, we are set for a something of a frenzied finish to the year. Total bulk annuity deal volumes are likely to be around £30bn (on a par with the record-breaking year of 2019) and several large longevity swap transactions also coming to conclusion. Given the global turmoil of the past two years, the UK risk settlement market might reasonably be rather proud of its resilience and understandably be looking forward to a break.

Looking to 2022

As we continue to emerge from the COVID-19 pandemic and the world evolves to the new-norm, our sights will remain firmly set on helping schemes of all sizes navigate through the challenges and opportunities that 2022 may bring.

With inflation at its highest level in recent years and continued uncertainty relating to the long-term outlook for longevity, it is likely to be a period of continued risk, but with the potential rewards for the best prepared schemes.  We expect to see more evolution in the market as schemes consider all options available - including increasingly accessible longevity swaps - to manage their risk.

If you are thinking about whether risk settlement might be suitable for your own scheme, then now is certainly a good time to get organised.

This post was funded by Aon

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