Mike Edwards, Partner, Aon
In line with recent years, 2022 is expected to be a tale of two halves for the bulk annuity market as we expect to see more pension scheme risk transferred to insurers in the second half of 2022 than the £12bn volume to 30 June 2022.
The question is how much more? While a number of larger transactions are expected to be completed before the year-end, yield rises are expected to dampen overall volumes as the size of each individual transaction has reduced. In some cases, we have seen scheme sizes more than halve over the course of 2022.
We expect the mix of transactions completed over the year to include both partial buy-ins (mainly for pensioners) and full scheme buy-ins/buyouts. However, the unprecedented rises in yields (and corresponding collateral calls for pension schemes) following the Mini Budget in late September has meant that many pension schemes have re-directed their focus to their interest rate and inflation hedging strategies and ensuring appropriate liquidity.
Therefore, for a small number of schemes considering partial pensioner buy-ins, some have paused to reconsider hedging positions and to ensure that there is sufficient scheme liquidity before proceeding. Conversely, a number of other schemes have been able to move quickly to capture highly attractive pricing which has resulted from rising yields. This is a further endorsement of the importance of transaction readiness in a market where the best pricing opportunities are often short-lived.
In some ways, this is a similar situation to 2020 when Covid-19 first impacted financial markets, albeit with different factors driving scheme decisions. At that time, we saw some schemes put projects on hold due to concerns about liquidity, while others were able to capitalise on a short window of highly attractive pricing - but at that time largely due to widening credit spreads.
Now, due to yield rises, many schemes have also seen their solvency positions improve dramatically as:
- absolute values of assets, liabilities and therefore deficits have fallen
- funding levels have improved due to many schemes not being fully hedged against solvency liabilities
On the face of it, this suggests more schemes are now closer than ever to achieving their endgame objective and have achieved this much more quickly than they could previously have anticipated. Some key questions for these schemes will be:
(a) can they lock in the solvency funding level gains they have seen?
(b) is now the right time to approach the bulk annuity market for quotes (given they are now either in surplus or cheque writing distance for the scheme employer)?
Importantly, meeting affordability criteria is only one aspect of transaction readiness, as full scheme transactions have wide-ranging considerations, and many of these schemes will not be able to act now due to not having:
- invested time in preparing underwriting information for insurers regarding their data and benefits
- considered wider aspects of full scheme transactions, such as the impact on member experience or approach to managing residual risks
- considered how illiquid asset holdings will be managed
For many schemes, illiquid assets have become a greater proportion of overall assets due to recent yield rises and therefore a proportionately bigger problem to solve as part of any insurance transaction. While there are market solutions which we have utilised on many transactions, they are typically limited to situations where illiquid assets represent a lower proportion of overall portfolios.
For schemes that are able to work through the above issues quickly, there may be opportunities in the current market, but for others they should focus on preparation to ensure that future opportunities are not missed. They should also consider doing what they can from an investment perspective to lock into a newly improved position.
We would caution against rushing to market because of funding level improvements unless transaction readiness can be demonstrated in other areas, as this can ultimately be counterproductive. An aborted approach to market can be damaging for a scheme's credibility with insurers if it then looks to transact in future.
Overall, we expect a busy end to 2022 and this continuing into 2023 in all areas of the risk settlement market. As ever, the schemes that have invested in a robust preparation programme will achieve the best outcomes.
This post is funded by Aon
