Market volatility to provide more derisking opportunities this year
On the go: Readiness to execute pension risk transfer deals will be key to derisking strategies this year, according to Willis Towers Watson.
Investment markets are likely to be volatile through much of the year, driven by uncertainty over the impact of December’s Brexit agreement and the continuing pandemic, the consultancy said.
This means it is vital for schemes looking to execute buy-ins or buyouts to be fully prepared to transact quickly should attractive pricing opportunities arise.
“We expect to see more schemes working in partnership with insurers to monitor market conditions, determine if and when the right time to act is and identify those windows of opportunity,” wrote Louise Nash, actuarial consultant, and Matt Wiberg, senior consultant, in Willis Towers Watson’s latest annual derisking report.
More than £30bn worth of pension insurance deals completed last year, with the consultancy estimating that further transactions worth a combined £4bn would complete in the next few weeks.
The group forecast that 2021 would bring around £30bn of new pension insurance deals and £24bn in longevity reinsurance transactions.
The latter prediction was driven by attractive pensioner longevity swap pricing, with Willis Towers Watson highlighting the slowing rate of mortality improvements even before the Covid-19 pandemic.
The consultancy said that this had led to “the lowest pricing relative to pension scheme reserves on record”. Similar market conditions would continue “driving down prices for longevity swaps and bulk annuity transactions, which is expected to continue in 2021”, it added.
Ian Aley, managing director in the group’s transactions team, said the derisking market had remained “resilient” through the challenges of 2020, and scheme appetite for deals would remain high this year.
He added: “It remains to be seen what impact Covid-19 will have on longer-term expectations for mortality rates. For many schemes, the market pricing of longevity will look very attractive relative to their funding reserves.
“We therefore expect schemes will continue to look to lock into assumptions that are affordable against their current funding target to reduce future uncertainty as part of their wider hedging programmes.”