2023 is expected to be a record-breaking year for the UK bulk annuity market, surpassing the previous peak of £43bn, as it has already seen £21.1bn of business in HY1 which reflects a record first half year, said Aon in a recent report.
According to Aon’s data, the latest figure is the highest H1 volume yet seen. A level that was reached despite rising interest rates pushing down pension valuations over 2022-23, meaning an insurer needs to secure more members to reach the same volume compared with 2021.
The higher volumes reflect increased funding levels for many schemes; availability of capital due to 2022 volumes leaving insurers with significant spare capital and more willingness to write new business.
The figure demonstrates strong reinsurance market capacity; actions by annuity providers to optimise the capital efficiency of their annuity operation; and the return of £1bn+ transactions, as 2023 has seen a number of multi-billion-pound full scheme transactions – a trend that according to Aon is set to continue in the second half of 2023.
Aon said: “We expect the UK bulk annuity market to remain strong over the second half of 2023, so the 2019 record of £43bn of transactions could well be surpassed. The strong pipeline of schemes seeking to secure all liabilities in the near future could create insurer resource constraints, particularly for smaller schemes.
Analysts added: “The current market conditions make it essential for small schemes to have a clear and well-executed market strategy, such as via Aon’s Pathway.”
Aon’s report also highlighted that, at £222m, the average transaction size in HY1 was larger compared to £150m in 2022.This was the primary reason for the near doubling of volume versus H1 2022.
The number of deals has risen, but more modestly. It is the largest deals that significantly impact total volumes.
In 2022, there were five £1bn+ deals, amounting to £7.8bn. The first half of 2023 has already witnessed six £1bn+ deals, totalling £12.5bn, with others due to transact in the second half of the year.
Many of these deals do not require additional sponsor funding, with positive funding experience driving these schemes into surplus, analysts explain. Sub-£100m deals still dominate transactions by deal number, representing 67% of all completed transactions in the first half of 2023.
Analysts noted: “The market has become dominated by full scheme transactions – only three of the 95 deals in H1 2023 were pensioner-only deals, which had been the more prevalent structure until recently. This reflects the improvement in funding levels and is likely to be a trend for the foreseeable future.
“Another contributing factor is the pause in pension scheme’s programmes of phased annuity purchases, as more assets are instead set aside to increase the backing for LDI strategies, following the market turmoil in Autumn 2022.”
Currently, Just Group has completed the most deals in the first half of the year compared to other insurers – 35 deals totalling £1.5m. It is followed by Legal & General and Aviva, with 19 deals each but £4.8m and £3.4m respectively.
Analysts noted that, although volumes are currently led by five insurers, their relative positioning may not be meaningful until the full year data is available, as all of them are working on substantial transactions.
Aviva, Just and L&G have all launched revised offerings for streamlined pricing for smaller transactions in 2023. According to Aon, thi is an effort to support this segment of the market while leaving resource free for larger transactions.
With the decrease in pensioner-only deals, Scottish Widows and Canada Life are increasingly shifting their focus to full scheme transactions alongside the rest of the market. Canada Life wrote its first transaction with deferred members in July 2023, and Scottish Widows resumed full scheme deals this year.
Prudential Assurance Company (PAC), part of the M&G Group, re-entered the market this year and completed two full scheme transactions in the second half of the 2023, totalling £620m.
Canada Life and PAC wrote deals including deferred members in 2023, and now all nine bulk annuity providers are able to offer full scheme buyouts and member facing administration services
Analysts concluded: “PAC re-entering the bulk annuity market will increase competition and is important for maintaining market capacity, given that the strong demand from pension schemes is unlikely to lessen in the short term. Other insurers are currently considering whether to enter the UK bulk annuity market.”
Regarding the longevity swap market, Aon noted that it has so far seen £8.3bn of publicly announced deals (2022; £15.7bn, 2021 £15.2bn).
It stated: “The market remains competitive for schemes that are further away from buyout funding levels or do not have any plans for a bulk annuity transaction.”
