Analysts at Aon believe the UK risk settlement market will continue to thrive in 2021, with growth dependent on the number of larger transactions and on the speed at which the market for commercial consolidation develops.
The broker noted that activity in the settlement market during 2020 was defined by the need to manage the effects of COVID-19 across volatile financial markets, uncertainty around longevity considerations and the changeable appetite of providers.
Despite these challenges, the market proved resilient with over £50 billion of pension scheme liabilities transferred to insurers and reinsurers, across both bulk annuities and longevity swaps.
Additionally, there were significant developments in the market for commercial consolidation, with the launch of an interim regulatory framework from the Pensions Regulator in June which paves the way for schemes to consider consolidators as a serious endgame option.
“Some of the economic uncertainty, driven by Brexit and the ongoing COVID-19 pandemic, means that schemes will need to take a robust approach to get settlement transactions over the line in 2021,” said Martin Bird, senior partner and head of Risk Settlement at Aon.
“But we can be certain that there will inevitably be attractive pricing opportunities due to intermittent periods of market volatility and heightened provider appetite,” he added.
“We are currently working with a number of schemes which are already in the market looking for these opportunities. They are ‘transaction ready’ and consequently, able to move quickly.”
Overall volumes in 2020 were lower than 2019, but there was massive growth in the bulk annuity market for all but the largest transactions, with around a 50% increase in the volume of transactions below £1 billion in size, Aon reported.
“For smaller and mid-sized schemes this was driven by the emergence of better streamlined transaction processes, making them more appealing to insurers,” explained Mike Edwards, partner in Aon’s Risk Settlement team. “We saw attractive pricing over the whole year as insurers looked to fill the void in volume targets left by a lack of ‘mega-deals’.”
“Now in 2021, we anticipate strong appetite from insurers and reinsurers to grow the market further. We also expect there to be attractive opportunities for schemes of all sizes, with flexibility and nimbleness again being key themes,” Edwards continued.
“While many insurers continue to have the greatest appetite for billion pound-plus transactions, we expect that overall capacity in the market will be £30 billion to £40 billion, with a number of insurers looking to increase market share. However, overall volumes will, as always, be driven by the number of large transactions.”
Furthermore, Aon pointed to a general change in attitude from pension schemes towards longevity in 2020, with more schemes prioritising mitigation.
”Due to the combination of a wider than ever range of structuring options being available to schemes and increased capacity and appetite from the reinsurance market, the dynamics are currently very attractive for schemes wishing to pursue longevity swaps,” said Hannah Brinton, principal consultant in Aon’s Risk Settlement team.
But she further noted reinsurers have finite pricing resources and they are increasingly having to select and prioritise transactions in much the same way as we’ve seen in the bulk annuity market.”
“Now, more than ever, and to maximise reinsurer interest, schemes need to approach the reinsurance market with a clear strategy and objectives, as well as being thoroughly prepared from a data perspective,” Brinton said.
Finally, Aon commented on the significant interest in consolidation options from pension schemes that developed in the second half of 2020, which is expected to result in the first commercial consolidator transaction this year.
“The bigger question is how successful the consolidators will be at achieving scale and how quickly this may happen,” remarked Karen Gainsford, principal consultant in Aon’s Risk Settlement team.
“A common theme in 2020 was of keen interest among pension schemes but a reluctance to be a first mover. Once the first deals occur and the concept is proven, it is entirely possible that we could see the floodgates open to superfund transactions in 2021.”
