Aon, a professional services firm providing a range of risk, retirement, and health solutions, recently released a report on the UK risk settlement market, shedding light on significant trends and strategic shifts affecting the bulk annuity sector, especially in transactions under £100 million.
The report indicates a surge in smaller transactions, attributed to improved pension scheme funding levels and recent process enhancements by insurers.
Over the past 18 months, insurers have refined their systems to manage increasing demand, which is expected to sustain growth in this market segment.
Several insurers, including Just, Aviva, and Legal & General, have introduced streamlined broking processes for smaller deals, enabling a higher volume of transactions.
This push towards greater efficiency has been bolstered by new entrants to the market, such as Royal London and Utmost, both focusing on smaller transactions. Aon notes that this influx of new players, some emphasising technological innovations, could significantly boost the volume of smaller transactions in the sector.
As insurers balance broader business goals with a desire to maintain high transaction volumes, their appetite for smaller deals is increasingly flexible. Aon reports that some insurers, having already met their targets for larger transactions in 2024, are quoting smaller deals for completion in early 2025.
Additionally, at least one traditionally large-deal-focused insurer has lowered its minimum transaction size to tap into new capacity, reflecting a broader market shift towards smaller deals.
Aon’s report also highlights the ongoing challenges pension schemes face with illiquid assets, particularly as they prepare for buy-ins. Illiquid holdings, such as property or private credit funds, are not easily converted to liquid assets suitable for transactions.
To manage these assets before completing a buy-in, schemes may consider deferred premium agreements, third-party financing, or brokers with customised sales strategies.
The effectiveness of these solutions has been demonstrated in some of the largest recent transactions, including those by RSA, Boots, and Telent, with Aon assisting clients in the sale of over £2.25 billion in illiquid assets to facilitate buy-ins.
In the first half of 2024, a record number of bulk annuity transactions were completed, totalling £15.1 billion. The second half of the year is expected to remain similarly active, with Aon projecting total 2024 volumes to reach £40-50 billion.
Additionally, the Prudential Regulation Authority (PRA) has issued new guidelines on funded reinsurance, a risk-transfer tool often used by insurers. According to Aon, these updated guidelines are likely to strengthen risk management within the industry, helping to safeguard policyholder protection.
Bulk annuity pricing has held steady throughout 2024, with returns relative to gilts showing minimal fluctuation. While Aon points to potential future volatility due to global political factors, schemes are already preparing for auctions in early 2025, suggesting that demand for bulk annuities is likely to remain strong in the coming year.
