Aon forecasts a rise in UK pension risk settlement in 2023 as the events of 2022 continue to filter through to the market.
Aon head of UK Risk Settlement Martin Bird says: “While 2022 was one of the busiest years we have seen in the risk settlement market, we have every expectation that 2023 will see it accelerate. We think there will be a focus on full scheme transactions driving significant volumes across the entire market, as well as a continued resurgence of the £-billion-plus ‘mega deals’.
“These bigger deals will, of course, consume large portions of capital and assets at both insurers and reinsurers. But with increasing use of new sources of capacity, such as funded reinsurance and capital market money – and with potentially more flexibility within the Solvency II framework to come – we expect to see a greater volume of mega deals in 2023 and future years.”
Bird says: “The trend of steadily increasing funding levels for schemes continued in 2022, while the impact of rising interest rates pushed many schemes to a position of being fully funded on a buyout basis. It meant that many more schemes found that although they were navigating new forms of volatility, they were also moving into ‘cheque writing’ territory much earlier than they expected. For their sponsors, moving to a full scheme buyout or buy-in transaction has to be an attractive proposition.
“Most importantly, the insurance market has the capacity to handle this demand. Insurer balance sheets proved to be resilient through the market turbulence and solvency positions reached record highs in the second half of 2022.”
Aon partner John Baines says: “We think that the outlook for pensioner buy-ins is rather more mixed. Market pricing is still very supportive of ‘exchanging gilts for annuities’, but one consequence of the newly emerging ‘LDI 2.0’ environment is that actual availability of gilts to support these deals is now far more challenging. Pricing might look attractive but more cautious views on leverage reduce headroom for partial annuities and are likely to dampen volumes in this sector of the market.
“Commercial consolidators may also be a casualty of the market shifts in 2022. The schemes that were actively considering this option are now more likely to be closer to buyout or on course for one earlier than they had thought likely. We are aware of many schemes that switched their plans and are instead looking at buyout.”
In November, the government released the findings of its evaluation of Solvency II and outlined the modifications it planned to implement. This focused on stimulating investments in the real economy through adjustments to the “matching adjustment” and a relaxation of capital requirements through changes to the risk margin requirements when it comes to bulk annuities was to be expected.
Baines says: “There is a balance to strike between stimulating economic growth through greater investment flexibility and ensuring policyholder protection through a robust and well-capitalised insurance regime. The Prudential Regulatory Authority’s response to this in 2023 and how it makes use of its supervisory tools, will be interesting to see.”
Bird says: “As risk settlement specialists, we believe that there really is no substitute for preparation. Whatever their financial capacity, there is a risk that insurers are overwhelmed by the volume of schemes coming to market and the demands on their resources. That means the importance of schemes standing out through good preparation is greater than ever.
“Additionally, the usual need for good quality data and clarity over the benefits to be insured is now joined by the importance of having the right assets in place. Many investment portfolios have significant allocations to illiquid assets – which are generally challenging to sell at short notice. It’s therefore vital to have clear plans on how to deal with asset transition within an insurance transaction. It will be a key theme in 2023, both for schemes in their preparation and for the insurance market when considering solutions to help make better decisions.”