Fully half of all UK defined benefit liabilities will either have been paid out to members or insured by the end of the decade, according to analysis by Mercer, as buy-in and buyout values topped £30bn in 2020.
Last year saw a record volume of risk transfer deals, amounting to £56bn across both bulk annuities and longevity swaps. The previous year’s figure was £51.5bn.
Longevity swaps made up £24.2bn of this figure, with the largest — also the largest on record — being the £10bn swap between Lloyds Banking Group Pensions Trustees and Pacific Life.
The figures also showed that bulk annuity volumes were down on 2019, with 2020’s 141 deals amounting to £31.8bn compared with 2019’s £43.8bn in 151 deals.
Schemes that were able to move quickly, particularly those which were established buyers with umbrella contracts, were best placed to take advantage of the price opportunities
Imogen Cothay, LCP
However, much of 2020’s dealing was driven by smaller transactions, compared with 2019’s trend for “jumbo” deals of more than £1bn.
The market volume for sub-£1bn bulk annuities was 40 per cent higher than any previous year, the figures showed, and more than half (77) of 2020’s deals were below £100m, with 21 being under £10m.
As a result, Mercer estimates that half of all DB liabilities will either have been paid out to members or insured by the end of the decade.
Andrew Ward, Mercer’s head of risk transfer, said: “The astonishing growth in bulk annuity deals below £1bn demonstrates a strong demand from maturing DB schemes wanting to take risk off the table.
“Over 2021, we expect to see around £60bn of risk transfer deals across the market, with alternative strategies such as capital-backed journey plans and the first DB superfund deals starting to play a part in schemes’ risk transfer journey planning,” he added.
He said the “exploding range of options” means trustees and sponsors “will need expert guidance to steer their ship into the most suitable harbour”.
Noting the increased levels of activity at the smaller end of the market, Ruth Ward, principal at Mercer, said 2020 “offered strong proof that work by both insurers and advisers to streamline broking processes is paying off for smaller schemes”.
“We expect these improvements will ensure capacity is maintained for smaller deals this year, and we are seeing even the smallest schemes achieve attractive price outcomes,” she added.
Buy-in and buyout volumes second largest on record
In its own breakdown of the figures, published on Thursday, LCP found that the £31.7bn buy-in/buyout market was dominated by four insurers, with Legal & General coming out on top with a 24 per cent market share, or £7.6bn, followed by Rothesay on 22 per cent (£7bn), and Aviva on 19 per cent (£5.6bn).
This amounted to a 50 per cent increase for Aviva over 2019’s figures.
Last year’s largest single transaction was the unnamed £3.3bn buy-in completed by Rothesay in December, one of only two transactions above £2bn, compared with six in 2019.
The year was instead defined by a surge in mid-sized transactions: 60 buy-ins/buyouts between £100m and £1bn represented a 67 per cent increase on the 36 recorded in 2019.
Imogen Cothay, partner at LCP, said that volumes “topping out at more than £30bn” had exceeded the consultancy’s £25bn prediction.
“The pandemic led to some exceptional pricing in spring 2020, fuelled by falls in the price of assets used by insurers to back their pricing,” she said, adding that many schemes were assessing their options and “deciding to accelerate their transaction timetable or to complete opportunistic transactions”.
“Schemes that were able to move quickly, particularly those which were established buyers with umbrella contracts, were best placed to take advantage of the price opportunities,” she said.
Charlie Finch, partner at LCP, said a surge in gilt yields has made for a positive start to 2021, increasing funding levels and creating extra derisking capacity.
“Combined with a strong desire from trustees and sponsors to lock down their risks, this is likely to lead to sustained volumes of longevity risk transfer over the next year,” he added.
A bumper year ahead
Meanwhile, analysis by Aon suggested that a combination of deals paused due to the coronavirus pandemic and new schemes coming on to the market “is expected to make for an exciting 2021”, with business volumes expected to once again top £30bn.
Risk settlement market breaks new record in 2020
On the go: New figures from Aon showed that 2020 was a record-breaking year for the risk settlement market, with 2021 likely to provide stiff competition.
“One boost to the market is that we have reached the point where — for the first time — all providers are building services to write full scheme transactions rather than focusing solely on pensioner-only deals,” Aon’s report stated.
Though much depends on the successful easing of lockdown and other pandemic-control measures throughout 2021, the report added that “2022 could see a substantial increase in demand, with a resurgence of the multibillion full-scheme buyouts that drove the market in 2019”.
