On the go: With many defined benefit schemes advancing in their derisking plan due to higher gilt yields, WTW is expecting full scheme buy-ins to dominate a “busy market”.
According to the consultancy’s latest derisking report, published on January 19, the bulk annuity market is forecast to achieve one of its biggest years on record in 2023, with at least £40bn in bulk annuity transactions and £20bn in longevity hedges expected to be completed.
Indeed, WTW estimates that this year could see the highest volume of deals ever recorded due to improved funding positions following a significant increase in gilt yields, along with some of the cheapest pricing seen in more than a decade.
However, as a result of lower scheme liabilities overall, this year is likely to see a higher volume of deals but lower average liability values being derisked, compared with previous years, it added.
In 2022, around £44bn of pensions derisking transactions were registered, with approximately £28bn in bulk annuity transactions and more than £16bn in longevity swaps.
WTW managing director for pension transactions Shelly Beard noted that last year there was “a significant increase in the number of full scheme buy-ins and this trend is expected to continue in 2023”.
She said: “The story of 2022 was one of increased gilt yields, widening corporate bond spreads, and improved longevity pricing.
“This has resulted in many pension schemes being further along their journey plan than anticipated and now close to, or at, a position where it is affordable to carry out a full scheme buy-in, which we expect will be the dominant type of transaction in 2023 and beyond.
“Furthermore, with some schemes no longer having the liquidity to undertake partial buy-ins, some trustees will prefer to undertake a single, full scheme transaction rather than a series of partial buy-ins, given the absolute size of their scheme has now reduced due to higher yields.”
Beard also expects schemes to accelerate transaction readiness, as some of these pension funds “may have experienced a rapid improvement in buyout funding levels, to the point of buyout being within reach, but they may not yet be transaction ready”.
Others, who cannot yet afford to buy out, “will have seen how rapidly affordability can change and will try to be in a position to move quickly when the time is right for them”, she added.
“Transaction readiness covers a wide range of areas, but investment strategy and strategic data cleansing are two areas that will be particularly important in order for schemes to be able to move quickly.”
