The pensions risk transfer market will pick up for the last six months of 2021 with an expected strong pipeline after a subdued first half, according to Legal & General and Willis Towers Watson.
In its half-year results published on August 4, L&G said that despite a quiet start to the year, demand from companies and pension schemes for insurance has remained robust and it expects a stronger market in the second half of the year.
This came after derisking activity slowed in the first quarter of 2021 among the 61 UK corporate pension funds surveyed by MandateWire. The number of bulk annuity deals reported on by MandateWire in Q1 stood at 13, and of these only seven were signed in the period — a stark fall from the 18 deals signed in Q4 2020.
Longevity risk now stands out as one of the biggest unmanaged risks for many schemes
Shelly Beard, Willis Towers Watson
Paige Wilson, new business manager for pensions risk transfers at Legal & General Retirement Institutional, commented: “As we begin to emerge from the other end of the pandemic, we’re seeing activity pick up and have a strong pipeline going into the second half.”
L&G said at the UK market level it was expecting around £20bn-£25bn to transact across the whole of 2021 and has already won or is in exclusive negotiations on £2bn of UK pension risk transfer business in the second half of the year.
Wilson said the company has “good visibility” of those schemes looking to transact in 2021 and added: “Our estimate of the UK PRT market writing between £20bn-£25bn is based on the deals that have transacted so far this year, including those not in the public domain, deals we’re exclusive on and the deals we are aware of in the pipeline.”
Shelly Beard, senior director at Willis Towers Watson, agreed that H2 will be busier for the bulk annuity markets as we continue to emerge from the pandemic.
“The start of 2021 has been quieter in the bulk annuity market than many expected, which we see as a ‘hangover’ from Covid in 2020, and also because many schemes are concentrating on their 2021 triennial funding valuations. H2 2021 is likely to be much busier, and a number of material deals have been completed already.”
By contrast, the longevity swap market in H1 2021 was relatively busy, with £13bn of deals completed, Beard said.
Tightening credit spreads go some way to explain why the pension risk transfer market had a quieter start to the year.
As Wilson explained: “In the first half of 2020, widening credit spreads helped insurers deliver some of the most attractive pricing seen in recent years, which resulted in strong PRT volumes. Credit spreads have since tightened, which has in part led to a quieter start to this year, but this has not translated into a lack of opportunities in the pension risk transfer market.”
Although there were lower expected volumes across the market than in the first half of 2020, L&G’s Wilson said well-prepared schemes “take advantage of attractive pricing”, and the insurer has supported 17 pension funds securing just under £3bn of members’ benefits.
2022 and beyond
Looking forward to 2022, Willis Towers Watson was expecting an “incredibly busy year” across both bulk annuities and longevity swaps, as schemes complete their valuations and look to further reduce risks. Beard said longevity risk in particular “now stands out as one of the biggest unmanaged risks for many schemes”.
While L&G was yet to have clear visibility of the 2022 pipeline, it expected demand for pension risk transfer to continue to be strong over the next 12-18 months as sponsoring companies and pension scheme trustees look to secure members’ benefits, said Wilson.
According to L&G’s report, the UK market has around £2.3tn of defined benefit pension liabilities, of which only around 12 per cent have been transferred to insurance companies to date, which the insurer said leaves a “sizeable opportunity for future growth”.
In the report, L&G said it remains confident in achieving its five-year ambition of writing £40bn-£50bn of UK pensions risk transfer business, and market commentators anticipated between £150bn-£250bn of demand over the next five years.
During H1 2021, 53 per cent of L&G’s UK transactions were with its investment management arm’s clients, which the company said demonstrated the strength of its client relationships.
