Mercer forecasts combined bulk annuities, longevity swaps and new risk transfer solutions to reach £60bn during 2022.
The growth is expected to be driven by a variety of factors, including pent-up demand and better affordability following significant improvements to funding levels of defined benefit (DB) pension schemes in 2021. Moves to de-risk investments, improvements in data quality and clear plans to address GMP equalisation also mean that more schemes than ever are getting in shape to pursue a transaction. Innovation in alternative risk transfer options continues at pace to meet the challenges faced by DB schemes. In particular, the long awaited announcement on DB superfunds provides a further impetus and Mercer expects to see the first transactions next year.
Andrew Ward, UK Head of DB Risk, Mercer said: “We predict 2022 to be the busiest year on record with more ‘jumbo’ buy-in and buy-out deals and longevity swaps expected. With demand likely to stretch providers’ capacity for providing proposals and implementing transactions, being well-prepared with a clear understanding of deal criteria is vital.”
Reflecting on 2021, Mr Ward commented: “2021 has been a year of two halves, with longevity swaps and small to mid-sized bulk annuity transactions dominating the first half and a surge in bulk annuity deals over the second half, including the Mercer-led £2.2bn Metal Box buy outwhich looks set to be the largest transaction of the year. The big winners have been those well-prepared schemes that came to market early with clear pricing targets and condensed broking processes. We are delighted to have advised on around one in four of the overall deals in 2021 and, in each case, helped clients to achieve their desired objectives. Despite the continued challenges for many from the evolving COVID-19 pandemic, the primary driver remains to obtain protection against uncontrolled risk.”
For those looking at smaller bulk annuity deals the latter half of 2021 was challenging, with insurers chasing larger deals to boost their year-end deal volumes. Ruth Ward, Principal, Mercer added: “We’re expecting capacity to return for smaller deals in the new year as the market resets, supported by streamlined processes for both insurers and advisers. We are pleased to have led around 20 deals of under £50m during 2021, helping schemes as small as £2m gain visibility with insurers and achieve their buy-out goals. For those further away from their end goal, a broad range of consolidation options including professional trusteeship, fiduciary management and DB master trusts can improve smaller scheme governance and member outcomes.”
Mr Ward concluded: “Given the improvements in funding levels this year and increased regulatory focus on long-term funding objectives, more schemes will be weighing up a diverse and growing range of risk transfer and alternative options for shoring up member security and moving towards their end goals. The starting point must be a clear understanding of objectives and the range of solutions so that trustees and sponsors can determine the right path and then follow it with confidence.”