This year is set to be the biggest on record for pension scheme de-risking, with £65bn of bulk annuity and longevity swap transactions anticipated to complete, according to Willis Towers Watson’s annual de-risking report.
Bulk annuity transactions are expected to account for £40bn of the total, with longevity swaps accounting for the remaining £25bn. According to recent WTW research, one-third of pension schemes, or 30 per cent, expect to de-risk their liabilities within the next three years, with 2022 likely to be a peak year due to a combination of competitive market pricing, pent-up demand from the pandemic, and competition between insurers and reinsurers seeking to fill their expanded targets.
WTW senior director Sadie Scaife says: “We know that the market conditions are likely to be favourable this year and the demand from pensions schemes is there, which is why we’re predicting 2022 to be the biggest ever year for pension scheme de-risking across both bulk annuity and longevity swap markets. The £40bn of buy-ins and buyouts we’re anticipating are likely to be from repeat deals as well as new pension schemes coming to market.
“We are also expecting the gradual trend towards full buyouts to continue, as schemes mature and funding levels improve, but also as PPF+ cases complete transactions. In these busy market conditions, we expect insurers and reinsurers to become more selective about which opportunities they will commit resources to, with schemes needing to be flexible on timescales if they want to maximise competition.
“For Trustees, more than ever, the focus will be on the security of member benefits, the member experience and an increased focus on Environmental Social and Governance (ESG) issues when selecting a provider for bulk annuities and longevity swaps. With more options now available to schemes, since the approval of the UK’s first superfund, Trustees will expect their insurance partners to demonstrate how they will provide financial security, as well as a commitment to ensuring an excellent member experience through modern and fit for purpose administration, clear communications and detailed transition planning.”
After a slow start, the bulk annuity market recovered in 2021 to record the third-largest year ever for pension de-risking deals. Last year, bulk annuities worth approximately £30bn were completed, as were nearly £20bn in longevity swaps. The number of completed transactions is expected to be similar to the 150 deals seen in 2020. Competitive pricing from insurers was a major driver once again, as more well-funded schemes sought to complete their journey plan by de-risking their liabilities in the insurance market.
Scaife adds: “2021 was a year of accelerated activity, starting slowly but finishing with a flourish, and we were pleased to have advised on every longevity swap transaction that was announced in the market last year,” said Scaife. “The consistently good pricing we’re seeing for clients has been largely due to increased allocations to illiquid assets in insurers’ investment strategies, but also because of better longevity pricing in the reinsurance market. There has also been a lot of innovation in the market this year, including the first longevity swap to cover predominantly deferred members.”
A summary of de-risking predictions for 2022 according to WTW are that pensions scheme transactions are expected to total £65bn, with £40bn from bulk annuities and £25bn from longevity swaps. The number of deals is expected to increase as well, though insurers will have to be selective about where they focus their attention due to limited resources. The provider markets will continue to expand to reflect scheme appetite, with new entrants into the pension scheme de-risking market expected. These will not all be in traditional insurance or reinsurance businesses; there will be new ways to allocate capital to the defined benefit pensions market, such as the expansion of third-party capital offerings and superfunds. Finally, Clara Pensions, the first UK-licensed superfund, is expected to complete its initial transactions.
