For pension risk settlement, 2022 has been one of the most turbulent, busy and eventful years on record.
The trend of steadily increasing funding levels continued for most pension schemes throughout the year. This in turn created a growing appetite to prepare for buyout, with affordability accelerating more quickly than many thought possible. But inevitably, the Mini Budget in September had a profound impact on the market.
For many schemes, while the ensuing liability-driven investment (LDI) crisis created huge volumes of work to test investment portfolio resilience, the underlying impact of rising interest rates propelled many schemes to a position of being fully funded on a buyout basis. Even for schemes that are not quite there, higher interest rates t and consequent lower liability and lower deficit positions, in nominal terms, mean that the actual cheque writing distance to address any shortfall is much smaller. As such, from a sponsor's perspective, it's now a very appealing environment to pursue a full scheme buy-in or buyout transaction.
The good news is that the insurance market has the capacity, with insurer balance sheets proving resilient through the market turbulence and solvency positions reaching record highs in the second half of the year.
Set against this market context, it already seems clear that 2023 will see a strong focus on full scheme transactions, driving significant volumes. However, the outlook for pensioner buy-ins seems rather more mixed. While market pricing is still very supportive of 'exchanging gilts for annuities', a consequence of the newly emerging ‘LDI 2.0' environment is that actual availability of gilts to support these deals is now far more challenging. While pricing might look attractive, more cautious views on leverage reduce headroom for partial annuities and are likely to dampen volumes in this sector of the market.
The other notable casualty of the changing landscape in 2022 has been the commercial consolidator market. More schemes who were actively pursuing this, are now likely to be closer to buyout or on course to do so within the foreseeable future. Indeed, many of the pipeline consolidator cases during the year have changed lanes and turned their attention to buyout deals instead.
Elsewhere, there has been the usual buzz of activity in the longevity swap market, with reinsurance capacity and pricing continuing to support a steady flow of transactions - with the Barclays £7bn deal demonstrating that capacity is available to support event the largest of schemes.
Across all transaction types, we have seen a resurgence of the ‘mega deal', something we expect to continue into 2023. This will of course consume large portions of capital capacity and assets at both insurers and reinsurer, but with increasing use of new sources of capacity (including funded reinsurance, capital market money and potential more flexibility within the Solvency II framework to come), we expect to see a greater volume of mega deals in 2023 and beyond.
As ever, with an increasing number of schemes nearing their endgame target, a key focus continues to be strong preparation. Insurers risk being overwhelmed by the volume of schemes coming to market at an accelerating rate. This means - more than ever - that it is important for schemes to stand out in a busy marketplace. As well as the usual need to have good quality data and clarity over benefits to be insured, it is now vitally important to have the right assets in place as well. In particular, many investment portfolios now have significant allocations to illiquid assets, which are generally challenging to transition to the insurance market. The LDI crisis shone a light on the challenges (and costs) of selling these assets in short order. This in turn highlighted the importance of having a clear plan of how to deal with asset transition as part of any insurance transaction. This will certainly be a major theme in 2023, both for schemes in their preparation, and for the insurance market in terms of developing innovative solutions to help address these challenges.
The final note of the year is saved for the much anticipated reform to Solvency II. After a long period of consultation and data gathering, the government published the outcome of its review in November and set out its intended package of reforms. From a bulk annuity perspective, as expected, this included a focus on encouraging investments in the real economy, both through changes to the so-called matching adjustment, and a relaxation of capital through amendments to the risk margin requirements. There remains an important balance to strike between stimulating economic growth through greater investment flexibility and ensuring policyholder protection through a robust and well capitalised insurance regime. It will therefore it will be interesting to see how the Prudential Regulatory Authority (PRA) responds in 2023 and makes use of its supervisory tools to ensure the ‘safety and soundness and policyholder protection'.
2022 - a turbulent, busy and eventful year indeed! Enjoy the Christmas break - a time to rest, relax and recharge. And prepare for another high tempo year ahead.
This post is funded by Aon