This year is set to be the biggest on record for pension scheme de-risking, with £65bn of bulk annuity and longevity swap transactions anticipated to complete, according to WTW’s (Willis Towers Watson’s) annual De-risking report. Bulk annuity transactions – also known as buy-ins and buyouts – will make up £40bn of the anticipated total, while longevity swaps are expected to complete the remaining £25bn.
According to recent WTW research, one in three (30%) pension schemes anticipate de-risking their liabilities in the next three years, and 2022 is likely to be a peak year due to a combination of competitive market pricing, pent-up demand from the pandemic and competition between insurers and reinsurers seeking to fill their expanded targets.
Sadie Scaife, Senior Director in WTW’s Transactions team, said: “We know that the market conditions are likely to be favourable this year and the demand from pensions schemes is there, which is why we’re predicting 2022 to be the biggest ever year for pension scheme de-risking across both bulk annuity and longevity swap markets. The £40bn of buy-ins and buyouts we’re anticipating are likely to be from repeat deals as well as new pension schemes coming to market.
“We are also expecting the gradual trend towards full buyouts to continue, as schemes mature and funding levels improve, but also as PPF+ cases complete transactions. In these busy market conditions we expect insurers and reinsurers to become more selective about which opportunities they will commit resources to, with schemes needing to be flexible on timescales if they want to maximise competition.
“For Trustees, more than ever, the focus will be on the security of member benefits, the member experience and an increased focus on Environmental Social and Governance (ESG) issues when selecting a provider for bulk annuities and longevity swaps. With more options now available to schemes, since the approval of the UK’s first superfund, Trustees will expect their insurance partners to demonstrate how they will provide financial security, as well as a commitment to ensuring an excellent member experience through modern and fit for purpose administration, clear communications and detailed transition planning.”
2021 de-risking review
In 2021 the bulk annuity market recovered from a slow start to record the third largest year ever for pensions de-risking deals. Bulk annuities totalling approximately £30bn completed last year, as well as nearly £20bn of longevity swaps. The number of completed transactions is expected to be similar to the 150 deals we saw in 2020. Competitive pricing from insurers was a major driver again as more well-funded schemes sought to conclude their journey plan by de-risking their liabilities in the insurance market.
“2021 was a year of accelerated activity, starting slowly but finishing with a flourish, and we were pleased to have advised on every longevity swap transaction that was announced in the market last year,” said Scaife. “The consistently good pricing we’re seeing for clients has been largely due to increased allocations to illiquid assets in insurers’ investment strategies, but also because of better longevity pricing in the reinsurance market. There has also been a lot of innovation in the market this year, including the first longevity swap to cover predominantly deferred members.”
Summary of de-risking predictions for 2022:
• Pensions scheme transactions expected to total £65bn, with £40bn from bulk annuities and £25bn from longevity swaps
• The number of deals is also expected to rise, although insurers will have to be selective about where they focus their attention due to limited resource
• The provider markets will continue to grow to reflect appetite from schemes, with new entrants to the pension scheme de-risking market anticipated
• These will not all be in traditional insurance or reinsurance businesses, we will also see innovative ways to allocate capital to the defined benefit pensions market, including the growth in third party capital offerings and superfunds
• Clara Pensions, the first UK authorised superfund, is likely to complete its first transactions in H1
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