As we begin 2025, we’ve been reflecting on the way pension schemes engage with insurers to source pricing and terms, with a particular focus on how market dynamics have changed recently, and might change in future.
The past
If we turn the clock back three years, to a world where long-term interest rates were less than 1%, and many schemes had significant buyout deficits, the buy-out market was busier than ever before. Annual premiums were between £25bn and £30bn, with volumes dominated by large well-funded schemes, partial buy-ins and some deals requiring significant sponsor funding.
Given market demand at that time (with around 150 transactions completed each year, with approximately half of transactions relating to schemes insuring liabilities of less than £50m), many schemes were able to obtain multiple insurer quotations from the 8 insurers active in the market at the time. The idea of a single insurer ‘exclusive' process was very much the exception rather than the norm.
The present
As demand exploded following the ‘mini budget' of 23 September 2022, the number of transactions being completed has grown substantially, with a record breaking 226 transactions completed in 2023 and 2024 likely to see in excess of 250 transactions completed.
As the market adjusted to the shift in supply and demand dynamics, 2023 saw insurers increasingly needing to be selective on the transactions they participated in and, in some cases, stipulate that they would only provide a quotation if offered exclusivity. This wasn't simply the position in the smaller scheme space, with some insurers indicating that they would only provide quotations for £500m transactions if offered exclusivity (although these schemes were ultimately able to run competitive processes across a number of insurers).
The first half of 2024 saw some 134 transactions completed, with 70% of these being for premiums of less than £50m. A significant proportion of these schemes are likely to have been required to enter into a single insurer ‘exclusive' process in order to obtain a guaranteed transactable quotation, as insurers were effectively spoilt for choice in the small scheme space. This has placed significant reliance on advisers to confirm whether the premium quoted offers reasonable value, in the context of the specific circumstances of each scheme.
The future
Looking forward, we are already seeing an increased willingness from insurers to be involved in competitive processes for schemes in the sub-£50m space, particularly those with liabilities of £20m or more. This reflects the significant growth in resourcing at insurers, increasing prevalence of streamlined insurer solutions and new entrants to the market which has increased the number of active insurers to ten and counting.
We expect this trend to continue as insurers implement further streamlining and increase their post-transaction resourcing (which for some insurers has limited the number of transactions they've been willing to complete in a given year, despite their pricing teams being able to accommodate a larger number of transactions). We anticipate that this will cause a further shift in supply and demand dynamics within the market, with insurers increasingly willing to quote in competitive processes at the smaller end of the market, forcing those who require ‘exclusive' processes to clearly differentiate their propositions to retain and gain market share.
This year, we expect to see an increased focus from insurers on the insurer engagement strategy being followed by schemes and their advisers.
For example, involvement in a competitive process at the smaller end of the market could be predicated on the number of insurers involved being capped, and the use of a streamlined single round process.
Trustees and sponsors will want to ensure they have the right insurers for their scheme involved in any shortlist. We expect this to initially mean advisors have to work with trustees and sponsors to set clear objectives and define success, but also keeping the strategy under review as the market continues to adjust to the new status quo.
Nikhil Patel is a senior risk transfer actuary and Andy Smith an actuary at Barnett Waddingham