LONDON, 14 December 2021 – Aon plc (NYSE: AON), a leading global professional services firm, expects the UK pension risk settlement market to see volumes of over £45 billion by the end of 2021 – the third year in a row that it has reached this level.
Compared with recent years, the market in the first half of 2021 was relatively subdued with £7.7 billion of bulk annuity deals completed. However, the pace then accelerated in the next six months and Aon expects that there will be close to £30 billion of bulk annuity deals completed by the end of the year.
Karen Gainsford, associate partner at Aon, said:
“The pattern of bulk annuity deals has been unusual in 2021 – no doubt as a result of wider market conditions. Even so, we think it’s likely that deal volumes from July to December will amount to over £20 billion. That would make it the second-busiest six-month period after the £26.3 billion recorded in H2 2019. It’s also worth noting that almost half of that 2019 figure was covered by just three schemes - Telent (£4.7 billion), National Grid (£4.4 billion over two deals) and Asda (£3.8 billion). Those were some of the largest deals ever completed in this field.
“It’s clear that the market is adapting to circumstances. This increase in the second half of the year was driven by trustees and corporates refocusing following a hiatus driven by the volatility of the COVID-19 pandemic, but also influenced by improved pricing from insurers and better funding and affordability positions.”
Karen Gainsford continued:
“While there was increased capacity, schemes that were looking to transact in H2 really needed to stand out to capture the best possible pricing, as there was significant competition for the attention of insurers. We have no reason to doubt that much the same situation will continue into the first quarter of next year.
“With this background, we have been advising schemes on what they can do to make better decisions and to ease the process of reaching their endgame via an insured solution. This need has become more pressing as competition for insurers’ attention has increased. Aon’s most recent Global Pension Risk Survey showed for the first time that more schemes than ever are targeting buyout as their long-term objective, rather than self-sufficiency.”
Tom Scott, associate partner, said:
“It has also been a busy 12 months in the longevity swap market, with disclosed transactions in 2021 expected to surpass £15 billion. As in previous years, the swap market continues to be dominated by a relatively small number of ‘mega deals’. This means that between the announcement of these transactions, it may appear that the market has ‘gone quiet’.
“The reality could not be further from that - there is currently significant behind-the-scenes activity ahead of the completion of the next wave of transactions.”
Strength in depth
Mike Edwards, partner at Aon, said:
“It’s not just pension schemes which need to be well-prepared. As an adviser, we are conscious of the importance of teams having strength in depth in order to handle the increase in transactions. Aon has grown its Risk Settlement team ahead of this market expansion, doubling in size over the past four years. More deals need more people with the right knowledge and experience.
“Schemes now understand the need to work with an experienced adviser that can navigate the challenges of the market, so they can be better informed and better advised. That’s particularly so in periods of heightened activity where there are attractive pricing opportunities alongside an equal need to be nimble to capture them and to manage execution risks.
“As an example - and this is unprecedented - we have recently seen schemes having to compete with each other to book available trade dates with fund managers in order to transition assets before year-end. That really does reflect how busy the market continues to be and we fully expect it to remain like this into 2022.”
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