Mike Edwards, Partner, Aon
Over recent years, there has been rapid evolution and growth across the UK risk settlement market in a variety of ways. This includes business volumes, the vast array of transaction shapes and sizes and not forgetting the changes of participating insurers in the market. Looking at the driver behind these changes, the majority stems from the innovation required to see the largest transactions over the line.
By our count, we have now broken through the ‘NRA retirement age' barrier for deals of at least £1 billion in size since the risk settlement market's inception in the mid-2000s, with at least 65 of these large deals having been completed. So, what does this mean for the £billion+ market – are we now living through its golden age?
Well, there's two sides to this coin…
In many respects, this now well-established end of the market has aged like a fine wine and matured over time, benefiting from the wisdom gained from its experiences (good and bad) over the years. The proof being that some insurers don't really view a one billion pound transaction as ‘big' these days, that's just business as usual.
Much like the pensioners this market has insured, the major events on the road to 65 have shaped the market we know today, with the greatest innovation resulting from the curveballs life has to offer. Quite notably, the illiquid asset problem facing many schemes in the last few years where, looking to insure in the short-term, they suddenly found themselves overweight in illiquid assets after yield rises in the aftermath of the 2022 mini budget. This required a significant amount of investment dexterity in conjunction with new insurer led solutions to shift the weight and complete these large transactions.
On the other hand, the market is nowhere near retirement, and we may still yet be in its infancy, with a relatively small proportion of the total pension liabilities being settled in the UK via the risk settlement market to date. To put this into context, there are known to be around 5,000 defined benefit pension schemes in the UK, with estimated total solvency liabilities well in excess of £1 Trillion. By the end of 2023, there had been an estimated total c£250 billion settled, and a further c£40 billion anticipated to be settled in 2024, representing c75% of pension scheme liabilities out there with their 'endgame' fate still to be reached. Setting aside the run-on vs buyout debate, this still leaves a vast amount of potential risk settlement transactions for insurers to navigate over the coming decade(s?).
Interestingly, of this c£250 billion already settled, we estimate around £150 billion have come from deals of £1 billion or more, making up the lion's share of deals to date. Unsurprisingly, the larger the scheme, usually means the larger the list of complexities and bespoke requirements to necessitate new solutions. The relative time and effort involved on behalf of Trustees, advisers and insurers in this end of the market, it's no wonder this is the key focus and origin for innovative solutions.
With a healthy appetite for competition between a growing number of insurers for large transactions (success on which can be quite binary in terms of deciding whether an insurer has a 'good or bad' year), innovation is often key to securing this business and for each deal that is struck several new obstacles arise and are typically solved each time.
As with other areas of the pensions market, like investment solutions, we regularly deploy the ideas developed for the largest schemes to other clients dealing with similar issues (just with fewer zeroes!) which then seep into the wider marketplace for the benefit of all schemes where relevant.
With this innovation, it brings with it the opportunities to push the limits of what has been achievable to date – the most headline grabbing of these includes deal size. In 2023, we saw the largest single scheme deal to date when Aon advised the Boots Pension Scheme on the £4.8 billion deal with L&G and also the largest UK transaction, RSA's £6.5 billion transaction with PIC, where Aon advised the Trustees of the c£4 billion SAL Pension Scheme. This year, the largest deal publicised is yet to exceed £2 billion. This doesn't mean however that jumbo deals are a thing of the past. Much to the contrary, with rumours circulating of jumbo deals in the planning, perhaps for transaction in 2025. Indeed, while insurers and advisers certainly haven't taken their foot off the gas, this year has felt somewhat like a year of gearing up for much larger things… be that total volumes or individual deal sizes. With insurers widening their appetite across the deal size spectrum, we are now seeing up to 7 insurers providing quotations for some £1 billion+ deals.
With recent new entrants to the market, or due to enter soon, it's clear 2025 is expected to be a year of exciting prospects and increased competition, meaning we expect there will be great deals to be struck for the largest pension schemes with bulk annuities in their sights. Indeed, with the anticipated number of jumbo deals coming to the market in the next 18 months, it is clear that this end of the market has not reached its twilight years. Quite the opposite, and we expect continual growth and innovation as we enter the golden age for large schemes looking to de-risk using bulk annuities.
