The bulk annuity market will be capable of absorbing between £30bn (€33bn)-£40bn of pension scheme deals this year with the longevity swap market also set to be busy, Aon has said, an outlook broadly in line with that painted by consultancies.

Willis Towers Watson last month said it was expecting £30bn of buy-ins and buyouts to be completed in 2021, plus £25bn of longevity swaps, while Mercer is projecting close to £60bn of bulk annuities, longevity swaps and new risk transfer solutions. Hymans Robertson has referred to bulk annuities in excess of £30bn during 2021.

In 2020 over £50bn of pension scheme liabilities were transferred to insurers and reinsurers across bulk annuities (more than £30bn) and longevity swaps (over £24bn), according to Willis Towers Watson.

Aon said the year was defined by the need to manage the effect of COVID-19 across volatile financial markets, uncertainty around longevity considerations, and the changeable appetite of providers.

One of the features of the 2020 de-risking market was the prevalence of small and mid-size transactions. Less than a quarter of disclosed 2020 bulk annuity volume has come from so-called mega deals of £1bn or more, according to Aon data.

The largest was a £2bn deal for the Old British Steel Pension Scheme, followed by a £1.6bn buy-in for the Merchant Navy Officers Pension Fund, a longevity swap conversion.

“Overall volumes in 2020 were lower than 2019, but we saw massive growth in the bulk annuity market for all but the largest transactions, with around a 50% increase in the volume of transactions below £1bn in size,” said Mike Edwards, partner in Aon’s Risk Settlement team.

Aon expects there to be attractive opportunities for schemes of all sizes in 2021, with flexibility and nimbleness again key.

“While many insurers continue to have the greatest appetite for billion pound-plus transactions, we expect that overall capacity in the market will be £30bn to £40bn, with a number of insurers looking to increase market share,” said Edwards.

“However, overall volumes will, as always, be driven by the number of large transactions.”

Buy-ins and buy-outs over the years

In the longevity swap market the largest transaction of 2020 was at the beginning of the year, a three-part transaction for £10bn for schemes sponsored by Lloyds Banking Group.

Hannah Brinton, principal consultant in Aon’s risk settlement team, said there was a general change in attitude from pension schemes towards longevity risk last year, “with more schemes prioritising its mitigation”.

In 2021 more than ever, with reinsurers increasingly having to select and prioritise transactions in much the same way as they do bulk annuities, pension schemes would need to be well-prepared if they wish to transact longevity swaps, Brinton said.

Willis Towers Watson last month said several longevity swaps were in progress for early this year.

Superfund breakthrough?

Advisers are also predicting the first deal with commercial defined benefit (DB) consolidators, so-called superfunds, this year.

“The bigger question,” said Karen Gainsford, principal consultant in Aon’s risk settlement team, “is how successful the consolidators will be at achieving scale and how quickly this may happen.

“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.”

Both Clara-Pensions and The Pensions SuperFund, the two commercial consolidators actively marketing themselves, have yet to pass the regulator’s assessment process.

At Mercer, Andrew Ward, UK head of risk transfer and DB journey planning, has said that the total UK DBuninsured universe in 2030 will be around half the size it is today, be that via risk transfer exercises or simply payments to pensioners.

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