Participants:
Chris Anderson, Head of Bulk Purchase Annuity Consulting, EY
Shelly Beard, Managing Director, WTW
James Mullins, Partner, Head of Risk Transfer Solutions, Hymans Robertson
The Pension Risk Transfer (PRT) space in the United Kingdom has been on a growth trajectory for much of the past decade. Life Risk News’ Greg Winterton spoke to Chris Anderson, Head of Bulk Purchase Annuity Consulting at EY; Shelly Beard, Managing Director at WTW; and James Mullins, Partner, Head of Risk Transfer Solutions at Hymans Robertson, to get their thoughts on the outlook – and some of the potential challenges – for the world’s largest PRT market.
GW: What are some of the main drivers underpinning the UK PRT market’s current growth spurt?
CA: On the demand side, the rise in interest rates that began in the second half of 2022 is the primary driver of increased activity in the pension risk transfer space, as it had the effect of improving the funding positions of many schemes. Schemes that were four, five, six years away from coming to market this time last year are now in a position to do so and are actively looking for quotes from insurers.
On the supply side, there is a lot of capital that’s looking to enter the market. There are firms looking to set up new bulk annuity providers, and firms that are looking to participate by offering funded reinsurance services.
SB: The improvement in funding levels due to interest rate rises is the main one but another item driving this is the changes in life expectancy data since the onset of Covid. A few years ago, some schemes thought that they would be looking at a buyout in eight to ten years, but now they might be looking at being ready in the next two to three years, depending on their hedging strategy. And that’s not a complete outlier – many schemes will have seen their plans brought forward by five years.
JM: I agree. And what I’d add is that the pension scheme trustees are keen to engage in this process. They’ve had this good fortune in terms of a vastly improved funding level, and it’s natural for them to want to insure their scheme as soon as they can. And we’re not just talking about pensioner buy-ins here – activity for full scheme buy-ins/buy-outs has materially increased as well and these are now the most common transactions in the market.
GW: What is one of the under-covered (i.e., the trade media doesn’t write or talk about it much) trends in the UK PRT market and why do you think this are important to highlight?
SB: Most of the coverage is of the bigger deals, the billion, or hundreds of millions of pounds deals. But so many UK defined benefit pension plans are small and its key that the market continues to serve those schemes too. It’s important to highlight this because members of these smaller schemes still deserve protection, and successfully insuring their scheme means that they can get access to better security and administrative support than small schemes can on their own.
JM: There are a few things in my opinion. I think the market underestimates how much work needs to be done on data after transactions are signed. Often people think that’s ‘job done’ but the work after that to tidy the data up and get it perfect so that it’s ready for buy-out is significant and detailed and involves a lot of people hours.
I also think the member experience is something else that’s important to mention. When a scheme does a buy-in, the member won’t notice anything different because the administration remains with the scheme. But when they move to buy-out, it’s a massive change – previously, the member had a relationship with their pension scheme and employer they might have worked for and now they have a contract with an insurance company. Member journey and communication is an under talked area.
Lastly, ESG does actually get good coverage, but I think it should get even more. Insurers are investing billions of pounds every year. It might well be over £50bn that flows through insurance companies during 2023. That could do an enormous amount of good if it’s invested in the right way. I’d like to see even more focus on the ESG side.
CA: I think the volume of companies trying to enter the UK’s bulk annuity market is a trend to watch, as a number of firms now have the approvals and the teams in place and are ready to start writing business. It’s not just existing insurers trying to enter, however. There’s a much wider range of interested parties including asset managers and sovereign wealth funds, as there aren’t many investments that can make a good internal rate of return over 30 years. This will be a big trend that will define the market in the next few years. But will the new providers be able to compete on price, and do they have something new to offer?
GW: Liquidating assets so a scheme can access capital to enter into a buyout or buy-in is a complicated challenge for trustees and the scheme advisors. What are some of the current challenges and solutions here?
CA: The main challenge for schemes is deciding from the myriad of options that are available to them. Some insurers may be willing to take the assets as part of the premiums, or the scheme could arrange for a deferral of premium or obtain a loan from the sponsor or a third party, or they could try to sell the assets themselves before coming to market. Any decision will depend on the assets in question.
SB: The biggest challenge for schemes is dealing with their less liquid holdings. This is a challenge for both schemes who are looking to proceed to a short-term buyout and those looking to manage liquidity more generally. That said, there are lots of options out there and the first step is to undertake a feasibility study to understand the best strategic approach depending on the asset type. Understanding the full breadth of options – for example using deferred premiums, secondary market sales, inspecie transferring to the insurer – as well as the potential for future market innovations – is absolutely key for schemes to get the best result.
JM: It’s possible to negotiate a tailored price lock with your chosen insurance company. This means that the insurer agrees that their buy-in premium will move in a very similar way to your pension scheme’s assets. This ensures that, in the final stages of the buy-in process when contracts are being agreed, the risk of the buy-in premium moving in a different way to your scheme’s assets is materially reduced. This gives much-needed security, and transaction confidence, for trustees and pension scheme sponsors. It’s also possible to ensure that your chosen insurer takes on all of the ‘out of market risk’ whilst scheme assets are being disinvested into cash and transitioned across to the insurer to pay the buy-in premium.
GW: What are some of the pros and cons of DBPP’s rushing to get a deal done now (because they are suddenly well funded) versus waiting?
JM: There have been eight insurance companies in the UK for seven years now, but we expect some new entrants into the market this year and in 2024, so some schemes might take the view that more competition might lead to better pricing. But it just makes sense to move quickly if you can. To my mind, the market is only going one way, so I’d say that assuming that a scheme is well prepared, there’s not a good enough reason to wait. I don’t believe that essentially trying to time the market is the best idea here.
CA: The challenge is that a scheme might miss out on better terms down the road. New entrants might offer better pricing and solutions that others can’t yet offer. We’re currently seeing schemes that can afford insurance now going ahead.
SB: The main pro for the scheme is the certainty of pricing. What I’d add on the downside is the uncertainty around whether you have got the best possible price. For example, pricing is partially driven by life expectancy, which is currently more uncertain than it’s been for a long time. That could be a reason why a scheme might look back and say they overpaid.
GW: What are some of the barriers to growth that the UK PRT market faces? Are any of these barriers quick(ish) fixes – e.g., less than 12 months – or are they more medium-long term, structural, and what can be done about it?
CA: The pension risk transfer space is resource intensive and requires specific skills, and finding this talent is a significant challenge. There is enough capital, assets and schemes, but there is only a small pool of people that understand how this all works, and all firms are going after the same targets. This is not only an insurance problem – for example, it’s also a challenge for employee benefit consultants that work for the pension schemes.
SB: I agree but I also think that there is the potential for capacity constraints in the medium term. Global reinsurers like longevity risk because it diversifies their mortality risk. But once reinsurers have enough longevity risk for maximum diversification, they might become less keen on some deals. And that ties into the human capital element. Insurers need people to do the work, win the business, price it, implement all the transactions and there is only a certain number of them that can do that. We’re at a point now where we’re seeing the insurers being pickier than ever when they decide whether to quote on a case. The power in this market used to be with the schemes, but currently it’s more with the insurers.
JM: Agreed on people power. These transactions require specialist skills, and the market seeing the shift in demand that it has in the past few years means that insurers become more constrained. They can only quote on so much business. Yes, they can improve technology and processes, and that helps. But I think we’ll see some transactions take longer in the next couple of years because of the challenges insurance companies face in people resources.
GW: What’s your bottom-line message to a DBPP scheme that, so far, has not taken its first steps on a PRT journey? What’s the one or two key questions they need to ask of themselves before taking that first step?
SB: Preparation is the main thing that comes to my mind. Schemes need to get the right advisor, get their data in order, and their governance structure. This isn’t something that should be rushed just because a scheme now finds itself in a much better funding place than expected.
JM: Preparation is the key. A scheme needs to understand where they are today and what preparation needs to be done and follow through on that – it could be data-related, it could be asset related – and then take steps to make sure they are addressing any gaps. And while they’re doing that, they need to figure out the best way to approach the market. Insurers are people constrained, and they won’t want to quote on everything. One way to address that is to commit to working with only one insurer. This approach materially moves them up the priority list and, with an experienced consultant, can be the best way to deliver excellent value. They might pick just two or three and have a process with a single round. All schemes use a consultant during this process – picking the right one goes a long way to ensuring the scheme is best placed to achieve a strong outcome.
CA: For schemes that haven’t taken any steps so far, it’s crucial to have data and benefits in order. Insurers want schemes to come to them with clean data so that they can understand what members they have, what they are entitled to, and when. Data-related issues are often what holds transactions back, so having clean, structured data is key.
This is also important for smaller schemes. When the market gets crowded, and resource constrained – like it is now – smaller schemes can lose out because it’s more beneficial for insurers to work with larger schemes. This means that smaller schemes need to make it as easy as possible for an insurer to do business with them, and clean data is the way to do that.
Chris Anderson is Head of Bulk Purchase Annuity Consulting at EY
Shelly Beard is Managing Director at WTW
James Mullins is Partner, Head of Risk Transfer Solutions at Hymans Robertson
