Martin Bird, Senior Partner and Head of Risk Settlement, Aon
With the dust beginning to settle on 2023, and the final deals of the year being hurriedly squeezed into insurer targets, it seems only right to reflect on what has been another incredible year for the risk settlement market.
Bigger and more complex
From the outset of 2023, we expected a hive of activity following the surge in funding levels for many schemes towards the end of 2022 - and the market certainly delivered! Starting the year with a bang, we saw the largest ever bulk annuity deal executed, with £6.5 billion of liabilities insured with PIC in a combined transaction for two schemes sponsored by RSA.
The Aon Risk Settlement team were proud to have been part of this landmark transaction, with a true team effort required to ensure the absolute success of the project across the variety of stakeholders involved. The complexities in this deal provided challenges that many large schemes now find themselves facing - including the hugely complex transition of assets to the insurer. Our Investment Risk Settlement colleagues played a highly crucial role in agreeing innovative solutions for the RSA schemes to exit their unintendedly high proportion of illiquid assets successfully navigating these issues to achieve an excellent outcome for the schemes, cementing themselves as true experts in this area. We expect continued innovation to deal with the ‘illiquid challenge' as insurers and third parties look to provide solutions. In particular, a key theme over the coming years will be how to unwind illiquid assets as part of a risk transfer transaction without destroying value.
Landmark transactions have dominated the headlines this year, including the largest ever single bulk annuity transaction with the Boots Pension Scheme securing £4.8 billion in a full-scheme buy-in with Legal & General. It was announced on the same day as the £4 billion transaction securing almost 50,000 members for the Co-op Section of the Co-operative Pension Scheme - and with Aon advising the trustees on both transactions. This was a truly record-breaking day for the bulk annuity market. Indeed, alongside other confidential transactions, the Aon team secured over £10 billion of liabilities in a single week, something we are particularly proud of, as it truly demonstrates the strength and depth of our growing and highly skilled team. As with the RSA project earlier in the year, each of these transactions solved complex illiquid asset challenges and further underlined that innovation is continuing rapidly and at scale.
Small schemes - still room at the inn
While the largest deals often dominate the headlines, small and mid-sized deals continue to contribute significantly to the buoyant risk transfer market. In fact, the smallest end of the market remains by far the busiest sector, with 67 percent of all deals completed in the first half of 2023 being those under £100 million, proving that small schemes are by no means being crowded out.
In response to this high demand, insurers operating at this end of the market are developing further streamlined approaches to continue to support schemes on their journey to buyout. One aspect of streamlining is for schemes to partner exclusively with a single insurer from a very early stage in the project, with the intention of focussing efforts for both the scheme and the insurer, and thereby increasing deal certainty. Although this requires some careful consideration and early planning - including how to address the perceived loss of competitive tension - this approach can, in the right circumstances, lead to better outcomes for schemes. Expect to see more of this in 2024.
Market overview - it's all about the numbers
Looking across the bulk annuity market, the average deal size in the first half of 2023 was c.£222 million, compared to c£150 million for 2022. This was largely due to the six £billion+ deals totalling £12.5 billion for the six-month period to the end of June 2023, compared to only five such deals taking place in the whole of 2022. We expect these ‘jumbo' deals will be a continuing trend as we move into 2024 and beyond.
Another trend we expect to continue in 2024, is the focus on full scheme transactions, which are now the most common transaction type. Only three of the 95 deals in H1 2023 were pensioner-only deals. This reflects that many schemes are unexpectedly closer to buyout than planned, both from a timing and affordability perspective. It also reflects that, in current market conditions, partial solutions have become more finely balanced from an investment headroom perspective - particularly in relation to collateral and leverage management following the market turmoil of late 2022.
With increasing complexity, comes increasing pressures on resource and an increasing need for innovation. In fact, our 2023 UK Insurer Survey revealed that insurers deem the number one risk to the bulk annuity market to be resource - whether for the insurers themselves, administrators who have a huge variety of projects in their pipeline or indeed the advisory market. With limited bandwidth to process deals, insurers are focusing their efforts on only the best prepared schemes, while recruiting additional resource into their teams to meet demand. Similarly, as Aon's Risk Settlement team helped schemes to secure more than c.£20 billion of liabilities in 2023 to date, our team grew by over 20 percent and we will continue to do so to support ongoing demand for our services.
One key development which may act to somewhat reduce concerns about capacity constraint is the emergence of new entrants to the UK bulk annuity market. In September this year, the number of active insurers grew from eight to nine with the addition of M&G, who completed a £330million transaction for the M&G Group Pension Scheme - another deal proudly led by Aon. With rumours continuing to circle about further entrants, we expect to see more to come. That said, while there has always been talk of this, new entrants have been slow to emerge. And there are good reasons for that, as aside from just assembling a suitable team and structure, there are - rightly - many regulatory hoops to get through. So, it will be interesting to see how this develops.
Alternatives to bulk annuities
Turning to alternative risk settlement options, longevity swap transactions had another busy year, with more than £10 billion of liabilities secured across four transactions. While the pension longevity swap market has always been somewhat ‘lumpy' in nature, typically seeing a relatively small number of mega-deals, the longevity reinsurance market itself has seen huge growth, with very significant demand directly from the insurers, who have relied on reinsurance capacity to support the bulk annuity market over the course of the year. Just as the bulk annuity market continues to grow, we see no sign of a slowdown in the use of longevity reinsurance as we head into 2024.
2023 also welcomed the long-awaited first ever pension superfund transaction, with Clara reaching agreement to enter into its first transaction with Sears Retail Pension Scheme. We wait in anticipation to see whether this opens the floodgates for this type of transaction, particularly against the backdrop of such a buoyant bulk annuity market, but it is pleasing to see proof of concept for another type of de-risking option.
Final remarks
2023 has undoubtedly been one of the most exciting and innovative years on record. The industry continues to evolve and rise to the occasion to meet demand. And with no sign of this demand slowing down, we are already looking forward to another busy and challenging year in 2024, and hopefully, further innovation emerging to continue to support schemes achieve their de-risking goals.
After such a busy year, our team will be using the festive period to recharge, reflect on a year of many highlights, and re-set to go again in 2024. We wish you all a relaxing time and look forward to seeing you on the other side!
