Full buy-ins to dominate 2023 pension derisking – WTW
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by Nick Reeve
More pension funds are expected to move to full scheme buy-ins this year to lock in attractive insurance pricing, according to Willis Towers Watson.
The unprecedented volatility in gilt markets in the second half of 2022 has moved many defined benefit schemes closer to full funding, the consultancy explained in its latest derisking market report.
In addition, with more focus from schemes on liquidity needs after the problems meeting collateral calls in September 2022, partial buy-ins are becoming less popular as they are totally illiquid, according to WTW’s actuarial consultant Louise Nash.
Tom Ashworth, director and bulk annuity specialist at WTW, said full scheme buy-ins could dominate the derisking market by number of deals in 2023.
“This is because the market for pensioner buy-ins is still very much alive, forming a key part of the de-risking toolkit for the right scheme, albeit that pool of schemes will be smaller than previously,” he said.
“In addition, we expect more schemes than previously to consider use of longevity swaps as a way of managing longevity risks. These schemes are often those of scale, and so we will continue to see significant liability transferred via pensioner buy-ins and longevity swaps.”
“In addition, we expect more schemes than previously to consider use of longevity swaps as a way of managing longevity risks. These schemes are often those of scale, and so we will continue to see significant liability transferred via pensioner buy-ins and longevity swaps.”
Last year saw more than £25bn worth of bulk annuity deals completed, along with more than £16bn of longevity swaps, WTW reported, based on preliminary data.
Ashworth estimated that 2023 could be a record-breaking year for the derisking market, predicting approximately £40bn worth of bulk annuity deals and £20bn of longevity swaps.
Nash said there were still situations in which partial buy-ins would suit schemes, including as part of a long-term derisking strategy. Pricing for partial buy-ins was likely to become “very compelling” during 2023 for those with suitable liquidity, she added.
WTW’s prediction of a record-breaking year echoes similar projections from Aon, which forecast a surge in de-risking transactions and “a greater volume of mega deals” – transactions worth £1bn or more.
Elsewhere in WTW’s report, the consultancy forecast more innovation from insurance companies as competition increases in the de-risking market. Ashworth said some newer insurers could focus on additional services for non-pensioner deals, while all insurance companies would be looking to enhance their ability to standardise or automate processes to relieve the pressure on their teams.
More options were also emerging for those schemes reaching buyout pricing while still holding illiquid assets such as private equity or private debt, WTW explained. These include deferring premium payments until the assets can be liquidated or securing a loan from the scheme sponsor.
