Last September, the UK pension risk transfer (PRT) market received a new entrant in the form of M&G, the ninth insurer to enter the space; its inaugural transactions were with its own pension fund, and an unnamed external scheme.
Then, this month, one entered, and one exited. On 8th March, the market officially welcomed its tenth member; Royal London announced its 2023 results in a press release, and one specific bullet point in the release had many in the industry talking.
“[We] Extended our annuity capabilities in advance of an intended participation in the bulk purchase annuities market, focused on providing a competitive solution to the trustees of defined benefit pension schemes,” said Royal London in the release.
Then, just five days later, on 13th March, Lloyds Banking Group sold its £6bn Scottish Widows bulk annuity portfolio to Rothesay.
“We’re on a mission to help people in the UK build financially secure futures, supporting the Group’s strategy of building a customer-focussed digital leader and integrated financial services provider. This sale will enable us to focus and invest in the insurance, pensions, investments, retirement and protection markets where we want to grow, whilst ensuring positive outcomes for our Bulk Annuities customers,” said Chira Barua, CEO of Scottish Widows and CEO Insurance, Pensions and Investments at Lloyds Banking Group, in a news release.
Never a dull moment in the UK’s PRT industry, apparently.
But it would be odd if this should come as a surprise. The UK PRT space has seen significant growth in the past few years; consulting firm Hymans Robertson published a press release on 12th March which stated that ‘total pension scheme buy-in and buy-out volumes for 2023 reached an all-time high with both the number and value of transactions secured the highest ever recorded’.
Data collected by Hymans Robertson shows the extent of the increase in deal activity. The firm published Risk Transfer Report 2024 on 1st February, its annual deep dive into the bulk annuities market in the UK. The appendix to the report contains a timeline of aggregated values of longevity swaps, buy-out and buy-in transactions since 2009.
Notably, until last year, the highest aggregate value of buy-in and buy-out transactions took place in 2019 and 2020, at £43.6bn and £31.3bn, respectively, before interest rates began to rise in the UK. But there were clearly some very large transactions that skewed the numbers; data provided by Hymans Robertson to Life Risk News suggests that a total of 153 buy-in and buy-out deals were completed in 2019, and 141 in total in 2020, compared with at least 254 in 2023 (Hymans Robertson will finalise its collection of 2023 data once all insurers have released their results later this month), where c£50bn worth of deals have so far been completed.
Many in the industry have wondered whether the market would end up being dominated by activity in the mid-larger end. The time commitment to analyse and price a £1bn deal is generally not ten times the effort it takes to do so for a £100m transaction; larger mandates make more money, which lead to some speculating whether smaller schemes might get pushed to the back of the queue. Fortunately, for trustees of smaller schemes that are looking at a bulk annuity solution, James Mullins, Head of Risk Transfer at Hymans Robertson, says in the press release that concern didn’t come to fruition in 2023.
“We also continue to see a healthy and competitive market for smaller schemes that want to transfer risk. For instance, all our buy-ins transactions under £30m received quotations from multiple insurers in 2023,” Mullins says.
Hymans Robertson also expects the UK PRT market to sustain the activity levels of last year into this – and beyond. Mullins says in the press release that “there are over 15 buy-in transactions due to come to market over the next few months that are each between £1bn and £2bn. This group of large transactions alone add up to around £30bn and that’s before we take into account the material flow of buy-ins that are less than £1bn, along with mega transactions that are several £billion in size.”
Many tailwinds exist to support Hymans Robertson’s view. That there are now nine insurers active in the UK PRT is an obvious one; there is simply more capacity to complete bulk annuity deals now. Also, the UK government has begun to implement changes to the Solvency II regulatory regime; a key change is a reduction in the risk margin that insurers need to hold, which should free up capital, allowing them to take on more bulk annuity business without exceeding solvency requirements. Additionally, wider investment options will exist, allowing insurers to invest in a broader range of assets, which could improve their ability to match the long-term liabilities of bulk annuities.
But one challenge that may serve to put the brakes on the PRT freight train is that of just how many people are available to do the work. TC Jefferson, Managing Partner at executive search firm The Plenum Group, says that activity at present is at an all-time high.
“Demand for pension risk transfer professionals is greater than ever,” he says. “There is significant competition for people with deal experience from both insurance companies and the specialist consulting teams. The demand is across the board, and we are increasingly fielding mandates for operations roles as well as pricing and consulting positions.”
The activity is so intense that the market is behaving almost like the tech industry of the late 2010s, and the banking industry pre-global financial crisis.
“We’ve seen more counter-offers in the last twelve months than at any time in the last 15 years combined,” says Jefferson. “And even firms that don’t have an active mandate are receptive to reviewing the details of someone who might be able to bring pension risk transfer expertise.”
The runway for the PRT market in the UK is long. Consulting firm WTW says that there are approximately £1.3trn of defined benefit liabilities in the UK, with only 15% of those having been insured via a bulk annuity deal. The extent to which human capital constraints impact the growth of the market remain to be seen, and the same can be said for the country’s regulatory changes. But for now, Mullins says that the recent past should be something of a ‘new normal’.
“£50bn a year will be the new normal for buy-in volumes, with the market expected to be at least that level every year for the remainder of the decade.”