By Martin Bird FIA, Senior Partner & Head of Risk Settlement – Aon Investments Limited
The bulk annuity market has developed considerably over recent years with increased transaction volumes, significant innovation to address the complexities of the UK defined benefit pension market and increasingly bespoke arrangements to support investment transitions to insurance providers.
Set in the broader context of ‘endgame planning’, the decision-making process when considering bulk annuity transactions requires a detailed examination of the merits of insurance, with a focus on delivering security and a great service for scheme members for decades to come. It is through this lens which we set out our six priorities.
These priorities ref lect our experience working with pension schemes and sponsoring employers in the UK on a day-to-day basis, and specifically in relation to supporting those clients who have either already executed bulk annuity transactions (with the Aon Risk Settlement team having led on over £72billion of BPA market deals over the past 6 years) or are contemplating insurance transactions in the future.
1. Embrace continued improvements in member experience
We have seen positive developments in recent years to enhance the member experience for pension schemes implementing buy-ins and transitioning to buyout. For example, insurers are now able to accommodate a wider range of member options in the ‘at retirement’ support available to members. Such flexibility is becoming more commonplace in the defined benefit landscape and, hence, is an increasingly important decision-making factor when schemes select an insurance provider. We urge a continued focus on this top ic. It will be equally important that insurer operational capacity keeps pace with the growth of business volumes in supporting the broader transition f rom buy-in to buyout and in ensuring a seamless experience for members.
2. Continued focus on innovation relating to illiquid assets
Over recent years, insurers and advisers have worked together to develop a variety of solutions so that illiquid assets held by pension schemes are not a barrier to risk transfer. These have included the use of deferred premiums or in-specie transfer of certain assets to insurers. In our view, more innovation is needed in this area, particularly for schemes that have reached their endgame sooner than anticipated and are unable to transition to insurance in a cost-effective way due to the costs and haircuts of unwinding complex illiquid asset portfolios. The delays associated with this often leave schemes exposed to market volatility and so we welcome continued broad industry discussion on how the transition could be improved and on the actions that could be taken to reduce risk and deliver better value to both schemes and the insurance sector.
3. Transparency regarding the use of Funded Reinsurance
We note the PRA’s letter to insurers of 9 January 2025 and, more broadly, the significant focus that this topic continues to receive. While we recognise that Funded Reinsurance can be a useful tool for insurers to enable competitive pricing and capital efficiency, as well as forming part of the risk management toolkit, we also very much support the PRA’s scrutiny to ensure appropriate controls are in place to maintain policyholder protection. We also call for increased public disclosure in this area – we view improved market understanding of the benefits and risks associated with this form of reinsurance as beneficial for continued market confidence in the insurance regime.
4. Greater transparency regarding progress on ESG matters
As well as understanding the financial strength and operational capability of insurers, many of our clients are keen to understand better insurer policies and philosophies on ESG matters, such as climate change, social impact reporting and their approach to diversity, equity and inclusion. This is already a core area of focus for clients, and we expect this focus only to grow in future. We would welcome greater transparency, not just on targets and ambitions, but also on actual progress and the tangible actions undertaken to drive better outcomes.
5. Planning for the future
While we anticipate market volumes will continue at current levels in the short-term, there is potential for these to grow at an accelerated pace over the coming years. In particular, while a significant proportion of schemes will look to ‘run-on’ in the short term, our most recent survey data still highlights that buyout remains the ultimate destination for the majority of schemes over time. In this context, we very much encourage insurers to engage further in the ‘insurance vs run-on’ debate, including in relation to revisions to surplus refund rules, and work with the advisory community to develop solutions that help schemes with the transition f rom a run-on path into insurance, and at the optimum time.
6. Insurer contribution to the growth of the UK economy
The current government remains focused on a productive growth agenda and wants to see meaningful progress on how the pensions sector contributes to this. Therefore, we think it would be beneficial if bulk annuity insurers set out with greater clarity the actions and investments that are being undertaken to support this. Again, we think greater engagement on the topic could help improve confidence in the insurance sector, as pension scheme decision-makers think about the future.
We look forward to continuing working with you over the coming year and beyond and welcome your feedback on the areas set out above. We also welcome any broader feedback that you think would benefit the advisory community in supporting pension schemes on the journey to insurance.
|
