Consultancy Willis Towers Watson (WTW) claims that 2021 was a busy year for bulk annuities and longevity swaps despite significant headwinds.
In its latest report – Pensions risk settlement: a review of 2021 – the firm recorded totals of just under £30bn (€36bn) of bulk annuities and £15bn of longevity swaps, making 2021 the third busiest year ever in this market.
The final deal volumes are still being calculated and will not be disclosed by the insurers for some time, said Ian Aley, head of transactions, and Shelly Beard, senior director of transactions, who are also the authors of the report.
However, the duo estimates that nearly £30bn of bulk annuities were completed last year, with the trend towards larger and more full-scheme transactions continuing.
The market had a slow first half, but volumes in the second half more than compensated for this and pension schemes were able to take advantage of particularly attractive pricing across all transaction types, they said.
“The consistently good pricing we’re seeing for clients has been largely due to increased allocations to illiquid assets in insurers’ investment strategies, as well as improved longevity reinsurance costs,” the authors noted.
WTW claims to have been at the forefront of the market over 2021, including acting as lead trustee adviser on 16 bulk annuities totalling £6.5bn of liabilities, expected to represent around a quarter of the market.
The largest bulk annuity of 2021 for which WTW advised on was a £2.2bn buyout for the Metal Box Pension Scheme. It also advised on three longevity swaps, covering £12.7bn of liabilities, representing 84% of the market, the consultancy stated.
“The momentum we have seen recently in the longevity swap market continued in 2021, with four swaps covering £15bn of liabilities being completed,” Aley and Beard said, adding that innovation was featured strongly in the market, including the first longevity swap to cover predominantly deferred members for AXA UK Pension Scheme, in which WTW participated as lead adviser.
The pricing in this market is currently at its most compelling level since it is very competitive, with a number of new providers as well as existing providers expanding their appetites.
Furthermore, Aley and Beard said: “We are observing some initial downwards pressure on pricing reflecting the likely longer term implications of COVID-19 on life expectancy – albeit it is going to be a long time before anyone understands this with certainty.”
The pair said: “Our clients have continued to view hedging longevity risk, where it is affordable to do so, as a sensible risk management technique.”
Looking forward to this year, WTW is predicting 2022 will be the biggest ever year for pension scheme de-risking across both bulk annuity and longevity swap markets – with £40bn of buy-ins and buyouts and £25bn of longevity swaps.
These deals will be generated both as a result of repeat transactions by those that have previously completed deals, as well as from pension schemes approaching the market for the first time.
“We are also expecting the gradual trend towards full buyouts to continue, as schemes mature and funding levels improve, but also as [Pension Protection Fund] PPF+ cases complete transactions,” they said.