Innovation needed to stop illiquid assets delaying bulk annuities

The company sent an open letter to UK insurance company chief executives last week setting out six priorities for the UK bulk annuity market, including calls for improvements in member experience, more transparency on sustainability, and for insurers to explain their contribution to the UK government’s growth agenda. 

Last year was a record year for bulk annuities, according to WTW data, which estimated that around £52bn worth of deals were agreed in 2024. 

In January, WTW predicted that the bulk annuity market will reach approximately £50bn in 2025. Stabilising market conditions and rises in gilt yields have boosted defined benefit (DB) pension schemes’ funding levels, readying more schemes for deals with the insurance market. 

In his letter, Aon’s Martin Bird acknowledged that insurers and advisers had collaborated to ensure that illiquid assets held by schemes do not serve as barriers to risk transfers, citing the use of deferred premiums or in-specie transfers of assets to insurers as solutions.

Handling illiquid assets

Companies such as Isio and XPS have launched specialist dealing services for pension schemes with illiquid assets to help them sell at an attractive price when preparing for the bulk annuity market. 

In addition, several insurers have begun offering deferred premiums and other options for schemes. 

“In our view, more innovation is needed in this area, particularly for schemes that have reached their endgame sooner than anticipated and are unable to transition to insurance in a cost-effective way due to the costs and haircuts of unwinding complex illiquid asset portfolios,” Bird wrote.  

“The delays associated with this often leave schemes exposed to market volatility and so we welcome continued broad industry discussion on how the transition could be improved and on the actions that could be taken to reduce risk and deliver better value to both schemes and the insurance sector.” 

Shelly Beard, managing director in WTW’s pension transactions team, said “relatively stable” conditions last year – combined with recent gilt market movements has helped a continued improvement in DB scheme funding. 

Trustees and sponsors had been working on handling illiquid assets as well as “drafting benefit specifications and cleaning up their data”, she added. 

“All of this is culminating in more schemes being ready to approach the insurance market to undertake full scheme buy-ins, with the increase in demand expected to be met in part by the increase in participants in the market,” Beard said. 

Contribution to the UK economy

The letter urged insurers to “engage further in the ‘insurance vs run-on’ debate”, acknowledging that many schemes will look to run-on in the near term. 

The letter also noted that many of Aon’s clients wanted to know more about insurers’ “policies and philosophies on ESG matters”, including on climate change and diversity, equity and inclusion. 

While Bird’s letter did not address political events in the US, companies with exposure to the world’s largest economy are currently reckoning with a new Trump presidency that is legislating against ESG and diversity policies. 

Bird also called for bulk annuity insurers to “set out with greater clarity the actions and investments that are being undertaken to support” the UK’s growth agenda, arguing that “greater engagement on the topic could help improve confidence in the insurance sector”. 

“ESG and the UK government’s productive growth agenda are important topics, but they shouldn’t come at the expense of benefit security.”

Sam Roberts, Cartwright

Cartwright Pension Trusts’ director of investment consulting Sam Roberts told Pensions Expert: “To the extent that they are accretive to benefit security, ESG and the UK government’s productive growth agenda are important topics, but they shouldn’t come at the expense of benefit security. 

“In practice, there will be some parts of these topics which will help and some which will hinder, and so a critical eye for detail will be needed to determine which is which. 

“Blindly adopting certain policies could go against the Financial Conduct Authority’s Consumer Duty requirements.”

ZEDRA Governance client director Alan Greenlees said: “Trustees’ decision making continues to be driven by what is best for the members.” 

The extent to which insurers invest in productive growth and UK infrastructure “is seen as white noise and does not influence the key discussions when trustees and sponsors are formalising their endgame”, he continued.