Charlotte Quarmby, Partner, Aon
The demand for bulk annuities continued to grow over 2023, with H1 2023 volumes reaching record levels. This year also saw the UK's largest annuity transaction on record, RSA's £6.5billion buy-in with PIC, with new ground being broken in respect of complexity and timing. But it was not the only large scheme to transact this year.
One reason for the marked increase in volumes is the number of £1 billion+ transactions. During H1 2023, there were six £1 billion+ transactions (half of which were advised by Aon). This compares to five £1 billion+ transactions over the whole of 2022. With a flurry of activity due to happen in the final few weeks of the year, as deals of all sizes are executed before the year-end, we expect there will be more major deals announced, making it a bumper year for the £1 billion+ deals.
But what are the key strategic considerations when taking a £1billion+ scheme to the insurance market?
One of the most powerful is the ‘negotiating power' of the trustees / sponsor and their advisers - the bigger the scheme, the larger the premium, and the more negotiating power the trustees and their advisers will have.
This also proves extremely useful when navigating the complexity of the deal. The larger the scheme, typically, the more complex the transaction will be. With greater scope for unusual benefit structures, bespoke commercial requests or illiquid asset holdings in large deals, this can provide an advantage to the insurer when negotiating, with the scheme looking to solve a complex problem only willing insurers can provide. The balance of these powers ultimately leads to a more complex transaction and requires an experienced risk settlement adviser to help navigate the best outcome for your scheme.
With this dynamic, many would agree that future innovation will emerge from these very large transactions. As we look towards 2024 and beyond, we consider three areas where transaction complexities for the largest of schemes can lead to innovation via solutions created for the wider market.
Commercial terms
Schemes of all sizes can access competitive pricing and commercial terms but the keys to unlocking certain aspects can vary by scheme size.
The very largest of schemes are expected to be able to benefit from contractual terms that smaller and mid-sized schemes can rarely achieve, for example:
- Termination rights would allow trustees to terminate the annuity policy during the buy-in phase, under pre-agreed conditions, such as the insurer failing to make payments to the scheme on time and insurer fraud. Should the trustees terminate the policy under one of these conditions, a payment will be due from the insurer to the trustees and the buy-in policy will cease from the date of termination.
- Collateral - an extension of termination rights, whereby the trustees still have some control over a ring-fenced portion of the assets held by the insurer. If the policy was terminated, trustees would get these assets back under the conditions of the termination rights.
Investments
For larger schemes, the investment portfolio will tend to be more complex. For instance, it will often include some illiquid holdings, which may not be expected to run off over several years. In recent years, schemes holding these types of assets may have had insurers declining to take them on, leading to potential delays in the transaction, or the asset being sold at an unfavourable rate in the open market. However, for the largest of schemes, insurers are increasingly more flexible in their approach. For instance, they may be willing to take on the illiquid holding as part of the buy-in, or they may be willing to accept a deferred premium until the asset has been run off. While this innovation began for large schemes only, with the illiquid problem impacting smaller schemes too, insurers are developing solutions for the whole market. We expect to see more innovation in this area in 2024 and beyond.
Data and benefits
The smaller end of the market is rapidly changing and, as the bulk annuity market gets busier, there is increasing pressure from a data and benefits perspective on smaller schemes to be ‘ready' at the point of transacting. However, for larger schemes, there is still scope to address data and benefit actions, such as data cleansing and GMP equalisation, after the buy-in transaction.
In addition, as the market gets busier and administrators come under increasing resourcing and capacity constraints, there may be scope for bigger schemes to consider more innovative ways to get data and benefit actions completed. For instance, we have started to see insurers be more willing to take on some of this work themselves. This may involve insurers hiring data and benefit resource into the business in order to provide dedicated resource to the transaction. Insurers may also consider taking on a scheme's incumbent administration function to help with data and benefits actions during the buy-in to buyout phase.
With the bulk annuity market predicted to continue its upward trajectory, we expect the number of mega deals will increase in 2024 and beyond. Given the complexities of schemes still to come to market, insurers will have to adapt to be able to meet the demand. With the largest deals having more levers to pull, we expect them to blaze a trail for the greater good of the whole market.
For further information on how insurers are working with larger schemes, please see our 2023 UK Insurer Survey
