Total pension scheme buy-in and buy-out volumes reached £15.8bn in the second half of 2022, according to a recent report by Hymans Robertson, a pensions and financial services consultancy.
It was around £27.7bn for the year to 31 December 2022 – similar to the volume completed in 2021, despite the increase in long-term interest rates, which reduced asset and liability values, according to the Half Year Risk Transfer Report for H2 2022.
Analysts also noted that the unparalleled market volatility over that time resulted in an extremely busy second half of the year, with the number of transactions at their highest volume for nearly ten years.
In total £15.8bn of buy-ins and buy-outs took place across over 124 transactions during H2 2022 with an average transaction size of £127m. Approximately 80% of that volume was in relation to buy-ins and the remaining 20% related to buy-outs.
In 2022, 202 transactions took place valued at around £27.7bn.
Commenting on the findings, James Mullins, Head of Risk Transfer at Hymans Robertson, commented: “As 2022 reached its halfway point, the risk transfer market remained resilient, despite concerns about rising inflation and economic uncertainty concluding with a turbulent political landscape in early Autumn.
“Large yield rises triggered a feedback loop of defined benefit pension schemes selling gilts to deleverage or potentially scale back hedging. As the dust settled after the market volatility, schemes reassessed their endgame journey plans.”
He added: “The risk transfer market remained strong at a time of unparalleled market volatility and challenges for pension scheme trustees. Market volatility led to widening of credit spreads, resulting in excellent pricing opportunities for some pension schemes already in the market during Q4 2022.
“The risk transfer market is expected to be extremely busy in 2023 and beyond. Insurers are looking for innovative ways to adapt to the growing demand, and some insurers have already put in place structures for smaller schemes who are prepared to work with that insurer on an exclusive basis.”
According to the report, buy-ins continue to dominate the market, with many schemes pursuing full-scheme buy-ins rather than gradually reducing risk through partial buy-ins.
Over 2021 and 2022, most transactions were partial buy-ins. However, analysts expect whole-scheme buy-ins to dominate the market from now on.
In addition, analysts also noted that pension schemes will often avoid moving straight to buy-out, given the work involved and the potential accounting impacts for pension scheme sponsors.
Regarding longevity swaps, last year was the third successive year for disclosed longevity swaps to exceed £15bn, with £15.7bn in 2022, the report found.
The overall average buy-in / buy-out deal size for the last year was £137m. The decrease from 2021 (£177m) is the result of the increase in long-term interest rates during 2022.
In 2022 four insurers (L&G, Standard Life, Aviva and PIC) held nearly 75% of the market by value. Having completed the largest buy-ins of the year with the British Steel Pension Scheme, L&G held more than a quarter of the market, giving it the largest share.
Standard Life’s share of 17% puts it in second place. During 2022 it secured a £1.1bn transaction with WH Smith and £700m buy-in for the Whitbread Group Pension Fund.
Aviva follows not far behind, with 16% of the market. It transacted the largest buy-out of 2022, worth £600m, and a buy-in of £800m. In 2022 PIC had a 15% market share and transacted on a £1.1bn buy-in for the Electronic Data Systems (EDS) 1994 pension scheme.
Rothesay completed a £1.2bn full-scheme buy-in with the Co-operative Pension Scheme in H2 2022. Its average deal size in 2022 was the largest of all insurers, at £370m. Specialist UK financial services group Just, completed its largest transaction to date, worth £500m, with Barloworld UK Pension Scheme.
It completed the most deals during 2022, transacting on 28% of the total number for the year. Just’s average deal size in 2022 was £46m.
Finally, Scottish Widows revamped its deferred proposition, and Canada Life built up its proposition. Both insurers now have appetite to write transactions with deferred members.
According to the report, given the expected increase in demand in the bulk annuity industry, insurer appetites are likely to adapt in 2023 and beyond.
Analysts concluded: “The pension scheme buy-in market is expected to exceed record highs of £50bn every year for the foreseeable future and could top £70bn in some years. We expect 80% of future bulk annuities to be whole-scheme buy-ins or buy-outs, in stark contrast with the past 16 years, when pensioner-only buy-ins predominated.”
“Projections show that by 2030, half of all the UK’s private-sector DB pension scheme liabilities will have been insured, covering 5m members’ benefits and close to £1trn of liabilities.
“Excellent pricing remains, but the market is no longer simply a buyer’s market. Pension schemes need to be smarter than ever in how they prepare and approach the market for buy-in quotations. For example, upfront shortlisting of insurers can be a powerful strategy. For some small schemes, exclusive partnerships will deliver the best results.”
