Based on data from the Pension Protection Fund’s ‘The Purple Book 2022’, Aon estimates that potentially up to two-thirds of all UK defined benefit (DB) schemes – around 3,000 in number – may have assets under £100 million. Altogether, these 3,000 so-called ‘smaller schemes’ account for approximately £100 billion worth of assets.
With the positive start to 2023 following on from the trend of improved funding in the latter part of 2022, many of these schemes are now finding that they are fully funded or approaching that state sooner than they had expected. This, inevitably, has fueled expectation that more of them will come to the risk settlement market in the near future – and at a time when the dynamics of the market are changing.
Joe Hathaway, associate partner at Aon, said: “We knew that 2023 would be busy for the risk settlement market. But improvements in funding have hastened the trends we foresaw - and while we particularly expected it to be an active year for smaller transactions, changes within the market are altering the way it is operating.
“We are aware that capacity restraints will limit insurers’ ability to quote on the increased number of requests they are receiving - particularly given the demands on their workforces - but we also know that insurers remain genuinely committed to providing solutions at the smaller end of the market. This is demonstrated by a number of insurers choosing to invest in further streamlining their broking processes - allowing them to quote on more smaller transactions than would otherwise have been the case.”
As a result of the significant market changes seen over recent months, Aon is seeing the following four trends emerging for smaller transactions - and advises that schemes take them into account when planning their approach to market:
• Schemes need to be flexible on transaction timing
Giving insurers as much flexibility as possible allows them more scope to resource transactions around the other quotations on which they are working. While this is true for all deal sizes, smaller transactions are less resource-intensive than larger transactions, so insurers can more readily utilise short-term pockets of resource to quote on these deals.
• More insurers are looking to quote on an exclusive basis
A single insurer working exclusively with a scheme to put forward a quotation has been the norm for sub-£10 million deals in the past. Insurers are looking to use this approach for a larger range of transactions, as it increases the certainty of completing a transaction if they can put forward a compelling offer.
While this approach allows insurers to quote on a wider range of deals, it also places more emphasis on schemes having a credible comparator solvency figure against which to assess the insurer’s pricing. This will ensure the price achieved is competitive and appropriately benchmarked against other transactions.
• Some insurers are looking to increase standardisation of parts of the quotation process
An example of this is where insurers use a standardised data template in order to make the process of providing a quotation more efficient. There has been a trend in recent times to streamline the quotation process for smaller transactions by using pre-agreed contracts and single quotation rounds - for example, using Aon and Eversheds’s ‘Pathway’ approach – and the trend is continuing this year. This is a developing area and schemes will need to be aware of insurers’ preferred quotation processes when preparing to approach the market.
• Asset preparation is increasingly an area of focus
Preparing a scheme’s assets before approaching insurers is increasingly important. Many investment strategies are anchored by illiquid assets, and being a forced seller means accepting a lower price, creating a shortfall. Innovation is happening and schemes have found solutions to this challenge, but advance thinking about exit strategies can help reduce cost and delays.
Schemes should take these steps well in advance of going to the insurance market. In the late stages of a transaction, having flexible investment tools that can be adjusted to match the insurer’s pricing basis and therefore lock-in deal affordability can be vital to success.
Joe Hathaway said: “The most important thing for schemes to bear in mind is that the market is still very much open. When schemes look at how they can navigate new forms of volatility, it is often the case that the best decision for their members is to move to an insurance-based solution. But they also know that circumstances and pricing need to be right for them to move to that. If they can correctly prepare their scheme and their approach, they should have every opportunity to move ahead with a transaction.”
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