This year is set to be the largest yet for the UK defined benefit (DB) pensions de-risking market with at least £40bn (€45.8bn) in bulk annuity transactions and £20bn in longevity hedges expected to be completed, according to WTW’s latest De-risking report, Shifting up a gear – de-risking report 2023.
Improved funding positions following a significant increase in Gilt yields, along with some of the cheapest pricing seen in over a decade, means that 2023 could see the highest volume of deals ever recorded, the consultancy stated.
However, as a result of lower scheme liabilities overall, this year is likely to see a higher volume of deals but lower average liability values being derisked, compared to previous years, it added.
Last year saw around £44bn of pensions de-risking transactions complete, with approximately £28bn in bulk annuity transactions and over £16bn in longevity swaps.
The second half of the year, traditionally a busier period, saw a dramatic change in Gilt yields which increased pension scheme funding levels and lowered buyout pricing and deficit levels significantly, leading to an increase in the number of transactions completing and contemplating coming to market this year.
Shelly Beard, managing director, pensions transactions, at WTW, said: “The bulk annuity and longevity hedging markets continue to be busy with demand from late 2022 spilling over into 2023. The rising Gilt yields, along with improved insurer pricing due to widening credit spreads and improved longevity reinsurance pricing has resulted in some schemes seeing an improvement in buyout funding levels to the extent that buyout is now within reach much earlier than anticipated.”
She added: “We have also seen a significant increase in the number of full scheme buy-ins and this trend is expected to continue in 2023.”
In 2022, WTW’s pensions transactions team led 25 transactions, ranging in size from £900,000 to £5.5bn.
The first half of the year typically sees lower volumes in the bulk annuity market. Around £12bn of bulk annuities were written in the first half of 2022 – up from £6bn in the first half of 2021, but significantly lower than the £22bn of bulk annuities written in the second half of 2021.
The increase in activity in the second half of the year is now a regular occurrence in the market as insurers look to hit their targets for the year, the report disclosed.
Rising Gilt yields
“The story of 2022 was one of increased Gilt yields, widening corporate bond spreads and improved longevity pricing. This has resulted in many pension schemes being further along their journey plan than anticipated and now close to, or at, a position where it is affordable to carry out a full scheme buy-in, which we expect will be the dominant type of transaction in 2023 and beyond,” Beard noted.
Furthermore, with some schemes no longer having the liquidity to undertake partial buy-ins, some trustees will prefer to undertake a single full scheme transaction rather than a series of partial buy-ins, given the absolute size of their scheme has now reduced due to higher yields, she said.
Another interesting consequence of the rise in Gilt yields was the impact on the amount of liabilities transferred to the bulk annuity insurers in 2022. On the face of it, 2022 was similar to 2020 and 2021 by volume of liabilities transferred, however this doesn’t tell the full story.
The significant increase in Gilt yields over the year, the report added, meant that the value of liabilities transferred by any transaction was significantly lower than it would have been a year or two before.
Schemes to accelerate transaction readiness
Beard also noted that several pension schemes may have experienced a “rapid improvement” in buyout funding levels but may not yet have been “transaction ready”.
She added: “Others, who cannot yet afford to buyout, will have seen how rapidly affordability can change and will try to be a position to move quickly when the time is right for them.”
Transaction readiness covers a wide range of areas, but investment strategy and strategic data cleansing are two areas that will be particularly important in order for schemes to be able to move quickly down the buyout path, she said.