Mercer, the global consulting subsidiary of broking and advisory giant Marsh & McLennan, is expecting a continued growth of risk transfers during 2021, with close to £60 billion of bulk annuities, longevity swaps and new risk transfer solutions projected.
2020 risk transfers are expected to reach £50 billion, demonstrating the industry’s resilience to pandemic headwinds and volatile financial markets.
Andrew Ward, UK Head of Risk Transfer and DB Journey Planning, Mercer commented: “We predict that 2021 will be the busiest year on record with the return of ‘mega’ buy-in and buy-out deals and longevity swaps.
“Given the growing range of risk transfer solutions available to trustees and sponsors, it is more important than ever that advisers provide clear guidance to help them identify the right path to achieve the best outcomes for all stakeholders.”
The consulting agency noted that smaller and mid-sized deals, and repeat transactions dominated in 2020, with streamlined insurer pricing processes expected to maintain volume for even the smallest buy-outs into 2021.
The increase is expected to be driven by a variety of factors, including better affordability as more schemes mature, increased demand from schemes and sponsors following the pandemic and innovation to meet the challenges faced by defined benefit (DB) pension schemes.
Ward added: “Despite the pandemic, this year is within touching distance of being the busiest ever for risk transfer to insurers and reinsurers, with roughly £50bn of transactions, including £30bn of bulk annuities. In a year like never before, risk transfer has remained high on the agenda for trustees and sponsors.”
He also noted that the the big winners have been those well-prepared schemes that have embraced volatility.
He mentioned how smaller deals have become more common throughout this year, as mega deals have been absent due to the current climate.
Ruth Ward, Principal, commented: “Streamlined processes for both insurers’ and advisers’ will drive sustained demand for smaller buy-out transactions into 2021, despite the anticipated return of mega deals.
“We have also helped small schemes under £5m gain more visibility with insurers and successfully capture price opportunities to achieve their buy-out goals.
“For those further away from their end goal, a broad spectrum of consolidation options including professional trusteeship, fiduciary management and DB master trusts can improve smaller scheme governance and member outcomes.”
She concluded: “Latent demand for risk transfer continues to grow strongly with over £2 trillion of DB liabilities maturing over time. Whether it is via risk transfer exercises or simply payments to pensioners, the total DB uninsured universe in 2030 will be around half the size it is today.
“Not every scheme will or should buy out and not every scheme should look in detail at longevity swaps, consolidation or member options.
“However, every trustee and every sponsor should be aware of these options, alongside other alternatives such as LDI, CDI, fiduciary management and DB Master Trusts, in order to devise the right long-term strategy for their plan.”
