On the go: The buy-in and buyout market is expected to have a “flurry of activity” over the next 12 months as defined benefit schemes look to accelerate their derisking plans, according to LCP.
The consultancy stated that a big jump in funding levels on full bulk annuity transactions for many schemes — in some cases more than 5 per cent — occurred during the first months of 2022.
As a result, many schemes are seeking to reduce investment risk, extend existing buy-ins or explore full scheme insurance, LCP added.
There are four key trends driving increased affordability, with the first being improved insurer pricing, particularly for deferred pensioners.
A reduction in pricing as reinsurers reflect the impact of the pandemic on longevity trends is also a factor, as well as rising interest rates and higher inflation improving funding positions.
Finally, intense competition between insurers as they vie for business is also having an impact, the consultancy said.
Similar to what happened following the brief period in the wake of the initial Covid-19 pandemic in early 2020, the turbulence in global markets as a result of geopolitical events could create a season of favourable insurer pricing.
LCP pointed out that this trend is also helped by insurer competition being at its most intense in a decade, with five insurers vying for top spot last year — each securing a market share of more than 10 per cent in 2021. This is up from four insurers in 2020 and three in 2019, it stated.
Furthermore, the upcoming Solvency II reforms — in which the government is looking to increase insurers’ flexibility to invest in long-term UK infrastructure and adopt measures to release fresh capital on to insurers’ balance sheets — may help to contain upward pressure on pricing due to the increased demand.
The consultancy expects key proposed changes, such as wider asset eligibility and less reliance on longevity reinsurance, to be helpful for insurers’ capacity to write increased volumes at current pricing levels. This may be vital if market volumes grow rapidly as projected, it added.
According to Charlie Finch, partner at LCP, the first half of 2022 has seen relatively modest volumes of bulk annuity transactions, “but this could prove to be the calm before the storm with a flurry of activity over the second half of the year”.
He said: “Improved affordability is likely to further accelerate activity into 2023.
“It’s vital that schemes have planned out their strategy carefully as they look ahead to when they will approach the insurance market.”
