By Tony Martinez from WTW
All of this is culminating in more schemes being ready to approach the insurance market to undertake full scheme buy-ins. This increase in demand will be met in part by the increase in participants in the market, with Royal London now established in the market, Utmost having completed their first transaction and Blumont (owned by Brookfield) expected to formally enter the market in early 2025, as Sadie Scaife discussed in her article Meeting the growing demand for bulk annuities.
Moreover, strong levels of longevity swap activity are also expected to continue. As we predicted last year, the proposed Mansion House Reforms have led to a number of pension schemes with strong sponsors taking a fresh look at their long-term target and aspirations, with some deciding that running on for longer may be the preferred way forward. However, this needs to be done in a risk-controlled way and so many of these schemes are looking at the use of longevity swaps as a means of mitigating the key remaining unrewarded risk. As our mortality experts, Cobus Daneel and Stephen Caine, debated in What’s going on in the longevity swap market?, future longevity expectations are as uncertain as ever and mitigating this risk will be attractive to some schemes.
Overall, I expect another busy year with volumes similar to 2024, with around £50bn of bulk annuities transacted and £20bn of longevity swaps. With the addition of new entrants, it is not out of the realms of possibility that 2025 could be the busiest year ever in the de-risking markets.
Prediction 2
A real focus on the buy-in to buyout phase
With so many schemes having transacted over the last few years, there is increasing focus from insurers, trustees and advisers on the ability of the insurance industry and administration providers to efficiently convert those buy-in policies to full buyouts. The challenge is particularly acute for those insurers that have completed a significant number of buy-ins in recent years. This pressure on insurer resource may create an opportunity to stand out to insurers for smaller deals that can transact with data that is already “buyout-ready” with a fast-track buy-in to buyout process.
The insurance market has been stepping up to the industry challenge, increasing resources and streamlining processes, however the processes have yet to be tested in full, and advisers and insurers alike will be closely monitoring developments. Further, the pensions administrators are facing their own capacity constraints with guaranteed minimum pension (GMP) equalisation and Pensions Dashboards projects, as well as their business-as-usual work, all competing with the resource required to complete data cleansing activities for buyout.
All of this combined means that robust, dedicated and focussed project management is essential. As Jenny Neale and Sarah Collison mentioned in their article Prioritising member experience in your de-risking project, using a specialist who knows how best to sequence these tasks and what strands can run in parallel will really add value.
For schemes that are looking to transact in 2025 we expect that an insurer’s credentials and experience converting buy-ins to a full buyout, along with their administration capabilities more generally, will come under greater scrutiny and be an increasingly important factor in selecting an insurer to partner with. In addition, we predict more development from the insurers, who will give trustees more guidance, direction and support, and potentially even take on direct responsibility for the buy-in to buyout phase.
Prediction 3
Continued development and innovation for smaller schemes
The UK defined benefit pension scheme universe is very skewed towards smaller schemes, making it an important part of the insurance market. With over half of our deals over the last few years being for schemes that are under £50m, we have seen increased focus by insurers on this segment of the market, which we predict will continue into 2025.
Some insurers are already well-established in the “small scheme” space, with four of them having set up processes involving fixed templates for benefits and data and pre-defined contracts to try to make the process as efficient as possible for the insurer to price and onboard. However, all of these templates are different and insurer-specific. Therefore, reworking a scheme’s data and benefit specification into several different formats can increase preparation costs for trustees where they are not going exclusive with one insurer from the start. So, this approach might lead to quicker timescales and more efficient processes once the Request for Quotations have been issued but, from the trustees’ perspective, more work and costs are required up front.
However, the small schemes landscape is evolving, with the three (potential) new entrants all covering the smaller end of the market, and the possibility of some insurers that have tended to focus on larger deals potentially transacting some small deals in 2025. This is expected to drive innovation, and to create more choice and the potential for some great opportunities for smaller schemes.
Prediction 4
More transactions outside of the traditional buy-in arena
At the time of writing, Clara has just completed three deals, all based on its traditional superfund model. The third transaction, with the Wates Group, was the first with an ongoing covenant and, whilst the superfund gateway principles still apply, the transaction demonstrates that this is a viable solution for a wider range of circumstances.
In addition, as outlined in an earlier article The increasing role of alternative risk transfer offerings, Clara has been expanding its offering (with its ‘Connected Covenant’ and ‘Bridge to Clara’ propositions) which has the potential to change the superfund landscape and open the gates to additional schemes and companies considering a superfund approach for securing their liabilities.
Similarly, we are seeing an increase in interest and availability of offerings that aren’t a traditional bulk annuity full scheme buy-in, be this because a scheme wants to run-on for longer or a company is worried about ‘trapped surplus’ in the scheme. This paves the way for trustees and sponsors to consider alternatives such as third party capital arrangements or insurance captives as part of their journey plans. This could be the year that alternative funding arrangements finally take off.
Other areas to keep your eye on
Regulation continuing to influence and shape the de-risking market
With the final Solvency UK measures having come into effect at the end of 2024, 2025 will see greater clarity on the extent of the impact of these reforms on the bulk annuity and longevity swap markets. Specifically, whether any of these reforms have led to a change in pricing or policyholder security.
However, that is only part of the story. 2024 saw increased scrutiny from the Prudential Regulation Authority (‘PRA’) on the bulk annuity market, reflecting the growth of the market and the size of some of the deals. For example, the PRA produced guidance on the use of Funded Reinsurance in the bulk annuity market. As the PRA aims to be a proactive regulator, we predict that this scrutiny will continue over 2025, especially as the market continues to grow and transact large volumes.
On the flip side, has there been a hint of relaxations from the Chancellor, Rachel Reeves? In her 2024 Mansion House speech, the insurance and reinsurance market was cited as one of the five priority growth opportunities in financial services and that the PRA, the Treasury and the National Wealth Fund will work together to help investment by insurers in productive assets, taking full advantage of the new Solvency UK regime. Will 2025 see wider reforms that have a knock-on impact on the bulk annuity market?
The increasing importance of environmental, social and governance (ESG)
As discussed in Remi Warren’s article 2024 – a year of sustainability in the pension de-risking market, increasingly, trustees are considering their members’ future as part of their fiduciary duty to act in the best interest of all beneficiaries.
The ESG research that WTW undertakes with the active insurers in the bulk annuity market aims both to drive up ESG standards and also to arm trustees with the information they need to consider these important issues. We have not yet seen a trustee select/deselect an insurer based specifically on ESG performance, but perhaps 2025 could see this for the first time.
Further new participants in the de-risking market?
The continued strong growth of the bulk annuity market makes it an attractive proposition for companies looking to invest. Will 2025 see new names enter the market, either via another new provider or through significant investment in one of the existing players?
As always, we will be watching markets closely to see if our predictions come true over 2025.
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