Data crunch: Although UK pension schemes have shown a reduced appetite for risk transfers so far this year, there could be a rise in the number of buyout and buy-in deals that will be completed during the second half of 2021.
Data from Pensions Expert’s sister title MandateWire show pension funds signed a total of 23 buyout, buy-in and longevity swap deals during the first six months of 2021, compared with 25 pension risk transfers tracked during the same time period last year.
Inflows into bulk annuity deals dropped by more than 70 per cent, from £18.9bn in the first half of 2020 to £5.6bn during the first six months of this year.
Appetite from trustees and sponsoring companies to reduce their pension risk exposures remains strong and competition among insurers has been fierce
Legal & General
The significant drop in inflows can be explained by smaller pension risk transfer deals that have been completed this year. The data reveal an average deal size this year of around £260m, compared with £900m in 2020.
Last year’s high inflows were driven by large individual transactions, such as the £10bn longevity swap secured by the £17.9bn Lloyds Bank Pension Scheme No. 1, the circa £8bn Lloyds Bank Pension No. 2 and the £13.7bn HBOS Final Salary Pension Scheme.
The schemes transferred their pensioner liabilities to Scottish Widows, which then passed on the risk to Pacific Life Re in order to achieve protection from the financial risk of an unexpected increase in life expectancy.
This year’s largest known transaction so far has been the £3bn longevity swap deal signed by the circa £6.3bn Axa UK Group Pension Scheme with insurer Hannover Re.
The scheme’s decision to cover “a material number of deferred members” was thought to be a first within the UK pensions market, Axa said in a statement.
In April, a large UK pension scheme also revealed a £6bn longevity swap agreement with the Prudential Insurance Company of America, with Zurich acting as intermediary on a pass-through basis. However, the name of the pension scheme was not disclosed.
Favourable pricing through alternatives
Industry experts expect a pick-up in derisking activity during the second half of this year.
In its August overview of the pension risk transfer market, Legal & General predicted “a healthy pipeline” of buy-in and buyout deals for the rest of this year.
“Appetite from trustees and sponsoring companies to reduce their pension risk exposures remains strong and competition among insurers has been fierce, with well-prepared pension schemes taking advantage of attractive opportunities to secure their members’ benefits,” it stated.
With the introduction of the Pension Schemes Act 2021, which will require UK defined benefit scheme trustees to set a long-term objective and reach the target by the time schemes are significantly mature, L&G expects to see an increase in demand for derisking strategies such as cash flow-driven investing and pension risk transfers.
Although credit spreads have tightened, “insurers continue to offer favourable pricing by extracting value from investing in alternative asset classes”, L&G stated.
Responding to trustee requirements, insurers are also increasingly focusing on incorporating environmental, social and governance factors into their risk frameworks, it added.
End of year rush?
If attractive pricing is available and last year’s upward trend persists, there could be a surge of pension risk transfers towards the end of the year.
MandateWire tracked 37 pension risk transfer transactions, with asset inflows of £27.7bn during the second half of last year. Almost 68 per cent of those deals were completed during the final quarter of the year.
The largest transaction reported on by MandateWire was a £5bn longevity swap secured by the £31.4bn Barclays Bank UK Retirement Fund with Reinsurance Group of America.
This article originally appeared on MandateWire.com
