This year has proved to be a record one for the pension risk transfer market. It is forecast that pension de-risking deals will total £50bn in 2023 — the highest level on record — with expectations that this market will continue to expand in 2024.
In its outlook for the year ahead, Standard Life says activity levels show no signs of slowing down in the pension risk transfer market, indicating another record-breaking year ahead.
This market however continues to evolve, driven by regulatory changes, capacity challenges and innovation to support demand from schemes for de-risking options as funding levels improve.
In 2023 the market has been dominated by full-scheme transactions, with Standard Life pointing out that there were signs of ‘mega-transactions’ starting to come to market, including the largest transaction written to date completing this year.
Looking ahead Standard Life said there is the potential for these trends to be compounded, particularly with with inflation forecast to return to projected levels and the Bank of England to slow interest rate rises.
However it pointed out this could lead to volatility in scheme surpluses and this will be a new consideration for trustees exploring the opportunities presented by a near term buy-out and thinking of locking in surpluses.
Standard Life’s managing director of defined benefit solution and reinsurance Kunal Sood says given accelerated demand in the insurance market and competitive pricing, capacity will remain a challenge — although he points out the industry is working to respond to this by scaling up operations and investing in people and technology.
“Given the importance of thorough administrative and preparatory work, we expect to see the wider market develop innovative solutions for schemes that have undertaken data preparation work, in order to support efficiencies in the de-risking process.
“Insurers will also look towards technological developments and optimised client and operational services to further improve the efficiency of their processes. Over 2023 alone, Standard Life increased the size of its client services team by 48 per cent, in preparation to support all existing and future clients on their journey through to buyout.”
He adds that against the backdrop of improved funding levels, it is likely there will be an increasing number of schemes with a significant portion of illiquid assets looking at options for de-risking.
“Illiquid assets and their management will continue to be a key consideration in planning for buy-in or buyout, and recent research by Standard Life showed that 40 per cent of trustees say recent changes in the market environment have prompted them to reduce scheme allocation to illiquid assets as a priority.
“Schemes, especially those that hold illiquid assets, will be re-assessing their wider investment strategy as they get in optimal shape for a transaction. While 100 per cent of trustees are considering the options available to them to manage illiquid assets as part of their journey to buy-out, many are not always simple or easy to process. This means insurers will look to support schemes in new and innovative ways, building on the tried and tested solutions such as deferred premium and secondary market sales that have become a staple transaction feature in 2023.”
With a number of the UK’s largest schemes now in surplus and engaging with the BPA market, it is likely that large scale transactions, such as those in the £1-2bn mark, will become even more prominent in 2024. “While a move to more sizeable deals is expected, there is still an active market for smaller transactions, particularly if those schemes select an insurer for the partnership from the outset.”
Finally Sood says regulation will continue to be a key issue in 2024, following the publication of recent DWP consultations on superfunds and the potential for an expanded remit for the Pension Protection Fund in the year ahead.
“While superfunds could be attractive for schemes with weak sponsors and no realistic prospect of buying out, they will unlikely impact wider demand in the BPA market. Sponsors and trustees continue to value the certainty that buy-out affords members in a volatile economic climate.
“Trustees and their sponsoring employers now have a number of principles to consider before entering into any transaction with a superfund, including evaluating expected timescales to buyout, insolvency risk of the employer, and the likelihood of members receiving full benefits.
“Solvency II reforms are expected to bring change in 2024 as well, although any changes need to be carefully developed and targeted with members at the front of mind.”
He adds: “Insurance remains the ideal solution for a number of trustees, sponsors and members, and all expectations indicate next year will be another successful year for the market. It is vital that schemes looking to de-risk are thoroughly prepared and ready to stand out in a competitive market, and Standard Life is well positioned to support the market in meeting this demand.”
