This includes a shifting regulatory environment and the ongoing dominance of full-scheme transactions, with Standard Life completing 10 of these transactions in the first half of 2023. There were also the first signs of mega-transactions starting to come to market, including the largest transaction written to date completing this year.
Looking ahead to next year, there is the potential for these trends to be compounded by the possible slowing of Bank of England rate increases as inflation comes under control. This may 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.
Innovation emerging to support market demand
Accelerated demand in the insurance market and competitive pricing means capacity will remain a challenge, although 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%, in preparation to support all existing and future clients on their journey through to buyout.
Managing illiquid assets and the focus on investment strategies
Against the current backdrop of improved funding levels, we will continue to see 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% 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% 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.
£1-2bn transactions set to be commonplace
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.
Shifting regulatory environment
The shifting regulatory environment following the publication of recent DWP consultations on superfunds and the potential for an expanded remit for the Pension Protection Fund will remain a key theme in 2024.
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.
Conclusion
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.
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