The UK’s pension risk transfer (PRT) market saw transactions totalling approximately £50bn in 2023, according to consultants Hymans Robertson. Last year saw eleven deals worth more than £1bn, according to the firm’s Risk Transfer Report, a record for a calendar year.
The big deals headline the activity reports for the market, but beneath the surface, there has been a concern among some industry commentators in recent years that the smaller schemes seeking an insurance solution may be left on the sidelines.
Personnel capacity issues are a very real headwind for the industry, and it’s not unusual for smaller value deals to take a similar amount of time to consummate as larger ones, but James Mullins, Head of Risk Transfer at Hymans Robertson, says in a 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.”
Good news for trustees of schemes that are yet to embark on their pension buy-in or buy-out journey. And one of the reasons for the smaller end of the market is holding its own is, in part, simply down to a maturing market.
“In recent years, insurers have increased standardisation and streamlined processes for small deals in an attempt to get more out their financial and human resources – resulting in better access to the small end of the market. We expect further developments in 2024, and more insurers could be better able to quote for small schemes,” says Claire O’Neill, Risk Transfer Specialist and Head of Operations at Hymans Robertson, in the report.
Still, the capacity issues in the market remain. And smaller plans that are keen to conclude a deal swiftly can help themselves by entering into an exclusive arrangement with an insurer. Indeed, in some cases, they might not have a choice.
“Some insurers are making exclusivity a condition of quoting for a small scheme,” says Iain Church, Head of Core Transactions at Hymans Robertson, in the report.
On the surface, that might sound like alarm bells to small scheme trustees. Conducting an auction with the help of a consulting firm to broker the deal surely makes the most sense in terms of securing the best price, so a cynic would say that these schemes are being forced into doing the insurer’s bidding. It’s a buyer’s market, apparently.
But Church says in the report that almost a third of buy-in and buy-out PRT deals in the UK are conducted on an exclusivity basis, and scheme trustees baulking at the exclusivity requirement shouldn’t be so concerned.
“In our experience, exclusivity still leads to competitive pricing when done right. Established risk transfer advisers and professional trustees see a lot of market pricing, so they know what excellent pricing looks like. Insurers know that if they don’t price appropriately, advisers and professional trustees are unlikely to proceed, and might not use them for exclusive processes in the future. Exclusivity can be powerful for catapulting small schemes up an insurer’s priority list – the certainty of selection, if the pricing is right, helps an insurer focus its efforts,” he says.
Going the exclusive route isn’t simply a case of picking one out of thin air. Different insurers have different strengths and weaknesses, and scheme trustees will need to partner with an insurer that aligns more closely with what’s important to them.
Considerations include everything from the financial strength of the insurer and the ability of the insurer to take the asset allocation mix from the scheme, all the way through to the member experience, which the insurer assumes responsibility for in a full buy-out transaction. Church says that schemes should be well prepared before selecting a partner insurer.
“The process of selecting an insurer prior to receiving pricing is an involved one, with many moving parts. Schemes need to have carefully thought through their objectives and weighed up what matters most to them, such as if they need a neat solution to deal with a specific complexity, or if they have a preference to transact with an incumbent insurer. Importantly, schemes need to have confidence their adviser can structure a process accordingly to exert commercial pressure and achieve value for money, without relying on competitive tension from other insurers.”
Another development in 2023 should provide the PRT market’s long tail with added capacity. M&G entered the market with two transactions in September last year, increasing the number of players in the space to nine.
Briefly, in March, that number looked like it was set to increase to ten after Royal London announced they were looking at the space, before Lloyds effectively exited the market shortly thereafter with its disposal of its Scottish Widows bulk annuity portfolio.
While these firms will need to grapple with human capital issues, that there is one new firm active in the market, and one potentially entering sooner rather than later, is an added boon to the smaller schemes in terms of the number of available insurers they might be able to work with.
Overall, the outlook for smaller schemes doesn’t seem as uncertain as it did a year or so ago.
“With there being over 150 transactions under £100m in 2023, it’s pleasing to see that there hasn’t been a negative impact so far on well-prepared schemes being able to access the risk transfer market,” said Church.
“Insurers are continuing to invest in efficiency, and with new entrants set to join the market, I expect we’ll continue to see a healthy and competitive market for schemes of all sizes this year and beyond,” he added.
