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Survey Report

Looking back at the 2020 UK de-risking market

Chapter one of the 2021 de-risking report

Pensions Corporate Consulting|Pensions Risk Solutions|Pension Board and Trustee Consulting|Pensions Technology

By Jenny Neale | January 19, 2021

Despite the challenges of the year, the high level of bulk annuity and longevity hedging activity seen in the last few years continued in 2020, with over £50bn of liabilities transferred to the insurance sector. In addition, the Pensions Regulator’s announcement in June on how it will oversee and authorise superfunds has opened up further options for sponsors and trustees looking to secure member benefits. Jenny Neale looks back at the trends of 2020.

Activity in the market during 2020

2018 and 2019 showed a stepped increase in the volume of bulk annuity business relative to previous years, in part due to a period of consistently attractive pricing and an improvement in schemes’ funding levels. 2020 continued that trend, with over £26bn of liabilities transferred to the insurance market through a buy-in or buyout, and longevity swaps put in place for a further £24bn of liability (as shown in Figure 1).

Around two-thirds of the liabilities secured through bulk annuities in 2019 – some £30bn – were for deals of over £1bn, which affected the dynamic of the market and meant that, on occasion, some smaller schemes found it harder to access the market as resource constraints meant that insurers focused their efforts on larger transactions. In contrast, less than half of the liabilities secured through bulk annuities in 2020 – around £10bn - were for deals in excess of £1bn, meaning smaller and mid-sized schemes were able to get much better traction with insurers.

Figure 2 – Transactions led by Willis Towers Watson in 2020
Value of deal Number of transactions Liability insured (£bn)
Buy-in / buyout Less than £100m 8 0.4
£100-500m 8 1.6
£500m + 4 6.6
Total 20 8.6
Longevity swaps 5 14.7

Source: Transactions led by Willis Towers Watson and publicly announced to date, December 2020.

The longevity swap market in 2020 was close to its largest year on record for the size of liabilities secured. This was, in part, due to the level of pricing seen – pricing for longevity swaps was very attractive and favourable relative to historic prices.

2020 also saw two longevity swaps transferred from a pension scheme to an insurer as part of a buy-in or buyout (otherwise known as a novation). These transactions demonstrate how longevity swaps can form a useful part of a de-risking plan without hindering the opportunity to convert to buy-in or buyout when asset values determine the time is right, providing the longevity swap terms are appropriately negotiated at the outset. One of the novations was as part of a £1.6bn buy-in for the Merchant Navy Officers Pension Fund in February, which you can read more about in chapter five: Innovation in the UK de-risking markets.

The impact of COVID-19

Of course, 2020 wasn’t without its challenges. As can be seen from Figure 3, however, the economic and investment environment at the start of the first lockdown also created some great opportunities for schemes that were able to transact quickly, due to a material widening of credit spreads. To put this in context, by transacting at the optimal time, a scheme transacting a pensioner buy-in could have saved up to 5% relative to transacting a few months earlier, which for some schemes helped bridge the gap to buyout. Mostly, the pricing opportunities were of benefit to those that were already exploring a buy-in with the market, but some schemes were able to move quickly due to an established relationship with an insurer from a previous deal. During Q2 alone, we completed 9 buy-ins, and over the course of the year, we transacted at least one deal with each of the UK’s eight insurers active in this space.

Whilst longevity pricing remained very attractive over the year, the impact of COVID-19 on longer term life expectancies is still uncertain, and may not be known for many years, if not decades. In chapter two: COVID-19 and the longevity insurance market, Sadie Scaife considers the mortality trends seen in 2020 and the impact this might have on future insurance pricing.

Despite a challenging year, it is reassuring to see that the insurers’ financial strength remains strong due to their low risk investment strategies and their prudent capital and regulatory regime. On the more practical side, clients and insurers were able to adapt quickly to the new working environment, including agreeing appropriate procedures for signing remotely, agreeing a reserve trustee to stand in if necessary, and monitoring and managing risk associated with the particularly volatile market conditions in the run up to signing. You can read more about our memories from the first lockdown in chapter three: Memories from Lockdown 1.0.

What about superfunds and capital backed solutions?

2020 also saw progress in the possibility of using a superfund as an alternative to the traditional insurance market. In June, the Pensions Regulator published guidance setting out how it will oversee superfunds until a permanent regulatory regime is legislated for, as well as setting out standards of what it will want to see in advance of each transaction.

Willis Towers Watson has carried out feasibility studies for a number of clients, and based on this, it’s reasonable to say that superfunds are likely to suit only a subset of clients at this time. However, for those in the right circumstances, a transfer to a superfund may allow members’ benefits to continue to be paid in full with the additional protection of the capital invested.

As an alternative, some schemes that wish to retain the link to their sponsor have explored capital backed solutions to provide reassurance that pensions can still be paid in downside scenarios. Tom Ashworth and Will Griffiths provide more detail on these solutions and the key considerations for pension schemes in chapter eight: New kids on the block – a look at Third Party Capital Solutions.

In summary, 2020 continued the high levels of buy-in, buyout and longevity hedging activity seen in recent years, but there were also significant steps forward in possible alternative end-game solutions. With the true long-term effects of COVID-19 still to be seen, what does this mean for the insurance market? What are the issues for schemes to consider if they have a surplus on buyout? Or for those that are further away from their end-game, how should the management of longevity risk be integrated into the investment strategy? Read on to hear from our experts.

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Case Study - BHS Senior Management Scheme: Achieving excellent member outcomes in a £2.5m PPF+ buyout

In 2020, we helped the Trustees of the BHS Senior Management Scheme (the Scheme) to exit the PPF assessment period and to secure an insurance policy with Legal & General (L&G).

The outcome for members was excellent – through a well-run process we were able to help the Trustees to secure benefits close to the benefits from the Scheme and significantly in excess of those payable by the PPF. The key points were:

  • We worked with the Trustees to identify an insurer to work with exclusively – given the small asset size of the Scheme and the complexity, an exclusive process ensured that the insurer was committed to the deal and was able to work flexibly with the Trustees.
  • The Trustees established a priority order of Scheme benefits to reinstate compared to the reduced PPF benefits with the aim of ensuring that the final benefits met members’ needs. We worked collaboratively with L&G through this process to ensure the member’s share of fund could be used to secure benefits according to this priority order.
  • The Scheme had appointed Independent Trustee Services (ITS) as an independent trustee. This had two key advantages for this transaction – ITS was able to leverage their wider market relationships and the transaction was able to proceed quickly and efficiently despite the iterative nature of the process for determining the benefits to be secured.

Next chapter - COVID-19 and the longevity hedging market


Jenny Neale

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