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There could be £80bn in bulk annuities and longevity swaps this year, consulting firm WTW predicts, citing further funding improvements last year as the driver of continued market activity.
Insurers could make deals worth £60bn in buyouts and transact £20bn in longevity swaps this year, according to WTW’s annual Pensions Derisking report. If the predictions come true, this would be a new record for pensions derisking. Source: WTW
The consultancy said last year saw more than £50bn written in bulk annuity transactions alone, adding that many schemes having already changed their investment strategies to secure the better funding positions while also preparing their data, with the intention to approach the insurance market this year.
“It’s clear that funding improvements have turbo-charged the pensions derisking market and, from a capacity perspective, we have already seen that the insurance market is capable of scaling up to meet demand,” said Jenny Neale, director in WTW’s pensions transactions team.
She noted that the strong market activity is also attracting new insurers to enter the market, increasing market capacity.
However, the government is looking for ways to encourage employers and schemes to run on and invest in productive finance, promising to make it easier to extract surplus in turn.
Neale said: “Despite the increased demand for derisking, the chancellor’s proposed Mansion House reforms could give pause for thought for some pension schemes and their sponsoring employers. Whilst we expect buyout to be the long-term destination for the majority of our clients, we have seen a number of schemes with strong sponsors initiating a fresh review of their long-term target.”
Where schemes do change target, she said it was “unlikely that these schemes would wish to run unrewarded risks, and consequently could look to hedge their demographic risks through the use of longevity swaps”.
Other developments the consultancy expects for this year include an increased focus on non-price factors when selecting an insurer, such as brand reputation, member experience and financial strength, more multi-billion pound transactions but also deals with smaller schemes.
This year could also see further superfund transactions. The consultancy believes 2024 will be key for the development of the superfund market, saying a few transactions in 2024 could help to give momentum.
The current strength of the pensions derisking market means the UK’s is the only life insurance sector in Europe with an improving outlook for 2024, ratings agency Fitch Ratings said earlier this month.
