Aon’s Ross Mitchell, a specialist in endgame investment strategies, explains the different factors informing insurer views on credit ahead of buyout.
11 April 2025
Should pension schemes be heavily invested in credit when they are approaching the bulk annuity market? In the past, this was the general thinking. Credit spreads have widened following the ongoing market volatility resulting from the US tariff announcements, but the picture remains just as unclear as to whether this traditional thinking is still correct. There is more at play than perhaps meets the eye.
- The sustained fall in credit spreads has been driving insurers to look for more attractive assets. While spreads have widened in the wake of uncertainty over tariffs, at the time of writing, they remain below the level we would expect to see insurers’ appetite increasing once again.
- As insurer pricing bases are driven by swaps, gilts now offer an attractive yield without the same risk. So the fact that gilts currently yield c.1% more than swaps is a key driver of pricing - perhaps more than credit spreads?
- Scheme size is another differentiator. Larger schemes may get very different answers to the credit question than small schemes, as re-investment risk can have a bearing for insurers – are you paying extra for someone to sell your assets?
- Insurers all take different views, which in turn will change through time. As your market approach strategy develops, your investment strategy can be refined in tandem – ensuring you have the liquidity to remain flexible is key,
In short, there is no longer a single ‘rule of thumb’ and there is no clear right answer.
In Q4 2024 alone, we led the investment advice on over £4bn of deals. Our breadth and depth of experience means we’re having these conversations across a range of schemes and insurers daily. If you are preparing for buy-in and reviewing your strategy, come and talk to us.