The bulk annuity market has been so busy in recent months that pension schemes have had to compete with each other to book available trade dates with fund managers to transition assets to insurers before the end of the year, according to Aon.
In a note from the consultancy this morning, Mike Edwards, a partner, said this was “unprecedented” and that the consultancy fully expected the risk settlement market to remain very busy into 2022.
After a relatively subdued first half of the year, with £7.7bn (€9bn) of bulk annuity deals, Aon today said it was expecting the volume of UK pension risk settlement deals to end up exceeding £45bn in 2021, with bulk annuity deal volumes in the second half of the year likely to amount to over £20bn.
The demands on fund managers’ human resources become greater where a pension scheme pays the premium to insurers in the form of a direct transfer of assets, known as an “in specie” transition, as opposed to divesting the assets for cash for onward payment to the insurer.
“Some of the fund managers have had a very limited number of days available to support in specie transitions,” Edwards told IPE. “This is really due to operational bandwidth given how active the second half of the year has been.”
“For some of our bulk annuity deals that are either due to close in the coming days or have closed recently schemes have essentially been given one day from the fund manager as the only day they have left for the asset transition before year-end.”
“The market has been flexible to accommodate this challenge”
Mike Edwards, partner at Aon
The availability of trading dates has driven the timing of some transactions’ completion, but it has not prevented any deals from completing based on Aon’s experience, according to Edwards.
“The market has been flexible to accommodate this challenge, with insurers prepared to extend exclusivity periods and price locks, advisers have been able to adjust project plans, and trustees have been flexible around execution time lines. In other cases fund managers have flexed the resource available to fit timelines,” he said.
“It has just meant all stakeholders have had to be nimble. It’s been quite an interesting feature of the market that we hadn’t seen before.”
Aon is expecting the risk settlement market to remain busy into 2022.
Karen Gainsford, associate partner at Aon, said the increase in activity in the second half of the year was driven by trustees and corporates refocusing following a hiatus driven by the volatility of the COVID-19 pandemic, but was also influenced by improved pricing from insurers and better funding and affordability positions.
She said that although there was increased capacity, schemes that were looking to transact in the second half of the year “really needed to stand out” to capture the best pricing as there was significant competition for the attention of insurers.
“We have no reason to doubt that much the same situation will continue into the first quarter of next year,” she said.
According to Aon’s global pension risk survey of UK defined benefit schemes, for the first time in the history of the survey more schemes are targeting buyout as their long-term objective rather than self-sufficiency.
Tom Scott, fellow associate partner at Aon, said the consultancy expected disclosed longevity swap transactions in 2021 to surpass £15bn and that “there is currently significant behind-the-scenes activity ahead of the completion of the next wave of transactions”.