There are expected to be a record number of pension schemes securing bulk annuity transfers and other risk settlement solutions in the next 12 months.
Aon has predicted that this market will continue to thrive in 2021, but says significant growth will depend on the number of ‘jumbo’ transactions taking place, and on the speed at which the market for commercial consolidation develops.
Activity in the settlement market during 2020 was defined by the need to manage the effect of Covid-19 across volatile financial markets, uncertainty around longevity considerations, and the changeable appetite of providers.
Despite this though, Aon says the market “remarkably resilient”, with over £50 billion of pension scheme liabilities transferred to insurers and reinsurers, across both bulk annuities and longevity swaps.
In addition there were significant developments in the market for commercial consolidation, with the launch of an interim regulatory framework from the Pensions Regulator in June, paving the way for schemes to consider consolidators as a serious endgame option.
Aon senior partner and head of Risk Settlement Martin Bird says: “Some of the economic uncertainty, driven by Brexit and the ongoing Covid pandemic, means that schemes will need to take a robust approach to get settlement transactions over the line in 2021.
“But we can be certain that there will inevitably be attractive pricing opportunities due to intermittent periods of market volatility and heightened provider appetite.”
“We are currently working with a number of schemes which are already in the market looking for these opportunities. They are ‘transaction ready’ and consequently, able to move quickly.”
Aon says that when it came to bulk annuities overall overall volumes in 2020 were lower than 2019. However there was significant growth in the market for all but the largest transactions, with around a 50 per cent increase in the volume of transactions below £1 billion in size.
Mike Edwards, partner in Aon’s Risk Settlement team adds: “For smaller and mid-sized schemes this was driven by the emergence of better streamlined transaction processes, making them more appealing to insurers.
“We saw attractive pricing over the whole year as insurers looked to fill the void in volume targets left by a lack of mega-deals.”
He adds that he anticipated strong appetite from insurers and reinsures in 2021 to grow the market further. “We also expect there to be attractive opportunities for schemes of all sizes, with flexibility and nimbleness again being key themes.
“While many insurers continue to have the greatest appetite for billion pound-plus transactions, we expect that overall capacity in the market will be £30 billion to £40 billion, with a number of insurers looking to increase market share. However, overall volumes will, as always, be driven by the number of large transactions.”
Aon says that in 2020 there was a general change in attitude from pension schemes towards longevity risk, with more schemes prioritising its mitigation.
Hannah Brinton, principal consultant in Aon’s Risk Settlement team, says: “Due to the combination of a wider than ever range of structuring options being available to schemes and increased capacity and appetite from the reinsurance market, the dynamics are currently very attractive for schemes wishing to pursue longevity swaps.”
“But reinsurers have finite pricing resources and they are increasingly having to select and prioritise transactions in much the same way as we’ve seen in the bulk annuity market. Now, more than ever, and to maximise reinsurer interest, schemes need to approach the reinsurance market with a clear strategy and objectives, as well as being thoroughly prepared from a data perspective.”
Aon add that it also expected the first commercial consolidation to take place in 2021. It adds that once the first deals occur and the concept is proven, it is entirely possible that the floodgates could open to a number of superfund transactions in 2021.
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