The risk settlement market of 2019 saw a significant change in the size of schemes coming successfully to the market. ‘Jumbo’ transactions of more than £2.5 billion, including those for Asda, National Grid, Rolls-Royce and Telent, were all completed during the year. By contrast, the biggest deal announced so far this year was one of £2 billion.
Nevertheless, while the top end of the market has changed, the lessons learnt from recent jumbo transactions have cascaded down and been used by schemes of all sizes which have transacted in 2020.
John Baines, partner in Aon’s Risk Settlement team, said: “Nothing much has been ordinary or gone to plan in any market during 2020 and the risk settlement market is not necessarily an exception to that. Even so, we still expect it to reach over £50 billion by the year’s end – and this is despite the lack of the jumbo transactions that we saw last year. In fact, one of the hallmarks of 2020 has been the smartness and adaptability of mid-sized transactions in learning from and embracing the innovations that went into the major transactions of last year.
“There’s often been talk in the pensions industry of innovation being driven by the larger transactions. That has never been truer than in recent years, with schemes able to leverage the scale of transactions and insurer appetite, in order to push the boundaries of what's possible in the market. We saw that in several of our projects last year, which benefited schemes in both pricing and terms.”
John Baines continued: “In recent years, we have seen member options exercises integrated with bulk annuity transactions, others have used deferred premiums, accommodated illiquid assets and executed using more complex transaction structures. Large transactions are also paving the way around GMP equalisation solutions for schemes. In all these cases, the scale of the transaction means that fixed costs for insurers in, for example, developing solutions and administration platforms, makes sense.”
Market activity shows that the mechanics and stages of a risk settlement deal are now much better understood by schemes than even five years ago. As a result, more schemes are coming to the market when they are genuinely ready, rather than approaching insurers on a more speculative basis.
Stephen Purves, partner in Aon's risk settlement team, said: “It’s more important than ever that schemes only approach the market when they are properly prepared, and we continue to see the benefits in insurer pricing received on these schemes. More schemes fully understand this now, as well as the value of getting their houses in order before approaching insurers. Moreover, getting the best deal relies on a scheme being 100% clear on what they are trying to achieve, so it can unlock pricing levels which might otherwise have not been available.
“While we are aware of some schemes approaching the market without clarity on the specific aims of the transaction they are pursuing, that is becoming much less common and it’s helping schemes to get the results they need by clearing space in the market. It also accounts for the growth in the number of small schemes moving to buyout which we have seen in the first 10 months of this year - and which we expect to continue into 2021.”
|
