Mega-transactions, managing pension scheme illiquid asset holdings through deferred premiums, and full-scheme transactions are among the key trends set to dominate the de-risking market during the second half of 2023, according to Standard Life managing director of defined benefit solutions and reinsurance Kunal Sood.
According to Standard Life research, one of the major trends expected to take centre stage is the rise of mega-transactions, with large schemes looking to engage with the bulk purchase annuity (BPA) market.
Sood says: “The market is already busy with large schemes up to c. £2bn in size. However, given the economic environment and persistently high inflation, very large schemes have also benefited from the rise in interest rates, and are now increasingly focused on de-risking, with some of the UK’s largest schemes now engaging with the BPA market.
“This development means that what we typically consider sizeable transactions – at around the £3-5bn mark – could become BPA ‘bread and butter’ over the next couple of years, with much larger transactions on the horizon.”
Another key consideration is the management of illiquid assets. Sood says: “Illiquid assets continue to be a key consideration in planning for a buyout, as the sudden surge in scheme funding levels has meant that many schemes are in a buyout surplus sooner than anticipated but without the liquid funds required to pay a bulk annuity premium.
“These are currently presenting in the market, with increased numbers of schemes requesting a deferral of premium over periods of up to two years. However, other solutions are also available to help manage illiquid assets.
“In some cases, the insurer may be able to accept the assets in-specie, however, this is often not the optimal solution for a scheme so it’s worth exploring whether selling or restructuring these assets could lead to a better outcome. Ultimately, for schemes in this position, it is worth having a strategy in place for how to manage illiquid assets if the journey to buyout has been considerably shortened.”
Changes in trends are clearly visible in how buy-ins are approached. According to Sood, a phased buy-in strategy was common in the past but full-scheme transactions have recently gained popularity. Over 90 per cent of deals entering the market in 2023 will be complete scheme transactions due to the improvement in financing levels and liquidity difficulties that have led many schemes to choose full buy-ins.
Sood says demand within the de-risking market has been strong, with a total volume of around £20bn announced in the first half of 2023. This figure is expected to surpass the previous record of £43.8bn set in 2019, indicating sustained activity in the market.
Additionally, Sood highlights that regulatory developments, such as the recent Department for Work and Pensions (DWP) consultations on superfunds and potential expansions for the Pension Protection Fund, will continue to be on the agenda during the second half of the year. He emphasises that any regulatory changes should prioritise creating the best outcomes for scheme members.
He says: “Following the publication of recent DWP consultations on superfunds and the potential for an expanded remit for the Pension Protection Fund, the regulatory environment will remain key on the agenda during the second half of the year.
“As with all proposals, the focus should be on creating the best outcomes for members, and bulk purchase annuity deals have proved to be a hugely successful innovation that have helped secure the pension benefits of millions of DB scheme members. Any potential changes will need to be carefully developed and targeted with this at front of mind.
“Demand in the de-risking market has met expectations in the first half of 2023, with volumes of c. £20bn already announced this year. Given this landscape, it seems inevitable that the £43.8bn record set in 2019 will be beaten this year.”
Sood says scheme trustees must carefully navigate these trends and regulatory considerations to secure the best outcomes for their members amidst a busy and dynamic market.
He says: “Looking ahead to the rest of the year, there are no signs of activity slowing down, and we expect that next year will be a continuation of the same, with high levels of demand for insurer attention.”