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Survey Report

Predictions for the 2021 UK de-risking market

Chapter nine of the 2021 de-risking report

Pensions Corporate Consulting|Pensions Risk Solutions|Pension Board and Trustee Consulting|Pensions Technology
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By Louise Nash and Matt Wiberg | January 19, 2021

Louise Nash and Matt Wiberg share their predictions on what we might see over the next year in the buoyant de-risking markets.

Prediction 1 - market volatility to create opportunities for fast movers

Our first prediction is very much based on a trend demonstrated in 2020. The COVID-19 pandemic caught the world and investment markets by surprise and we saw some of the biggest falls, recoveries and changes in investment yields that have been seen in many years. This gave rise to some short periods when bulk annuity pricing was at incredibly attractive levels, driven by credit spreads widening.

Many of the schemes that were actively monitoring or engaging the insurance market over this period, were able to adapt to the new working environment rapidly and had asset strategies that allowed them to move quickly, which enabled them to achieve buy-in pricing that exceeded their expectations at the start of their processes. In the first half of the year, our team helped to close 14 bulk annuity transactions which locked into these prices.

Looking into 2021, the continuing pandemic and Brexit could mean another bumpy ride in investment markets. The lesson from 2020 is that volatility can create opportunity if schemes have prepared and are actively monitoring. We expect to see more schemes working in partnership with insurers to monitor market conditions, determine if and when the right time to act is and identify those windows of opportunity.

Prediction 2 - expanding universe of risk management options

Over 2020, we started to see superfund cases heading towards interim clearance from the Pensions Regulator and the emergence of new risk management structures such as capital backed journey planning and Legal & General’s Assured Payment Policy offering, which completed its first deal with the AIB Group UK Pension Scheme in 2020.

Our prediction for 2021 is that we expect to see increasing use of this wider toolkit of risk management options available to pension schemes. We expect this growth to be accelerated particularly due to increasing numbers of sponsors under stress, and some schemes having experienced funding level falls in 2020.

We expect to see the first superfund deals completed in 2021 and there are several new entrants considering various offerings to schemes to provide capital in order to reduce uncertainty over the journey to buyout. With an increasing array of options to consider, schemes will need to have a clear understanding of both the art of the possible and their objectives, in order to ensure they are considering the options which are right for their situation and goals.

Prediction 3 - Attractive pensioner longevity swap pricing

Even before the COVID-19 pandemic, in recent years, mortality rates have not shown the level of sustained improvements that we saw between 2000 and 2014. These trends have been increasingly feeding through into the pricing offered by reinsurers for longevity swaps, resulting in the lowest pricing relative to pension scheme reserves on record. The longevity reinsurance market has been incredibly competitive, and a number of reinsurers have joined this market, all of which has been driving down prices. This attractive pricing also has a positive impact on bulk annuity pricing, as currently most insurers are reinsuring longevity risk as part of any transaction. We expect these attractive prices relative to historic levels to continue into 2021.

It remains to be seen what impact COVID-19 will have on longer term expectations for mortality rates, as Sadie Scaife discussed in her article: COVID-19 and the longevity insurance market. For many schemes, the market pricing of longevity will currently look very attractive relative to their funding reserves. We therefore expect some schemes will look to lock into assumptions which are affordable against their current funding target to reduce future uncertainty as part of their wider hedging programmes.

Prediction 4 - Busy market

Finally, although we certainly have been saying this every year in recent times, we predict that it is going to be another busy year in this market!

The pension scheme universe is maturing and looking to manage risk, as schemes become an increasingly legacy concern for sponsors and as funding improves. As Sadie Scaife noted in chapter two: COVID-19 and the longevity insurance market, in response to the Willis Towers Watson Emerging Trends in DB Pensions Survey 2020, 40% of schemes stated that they are targeting completing a bulk annuity or longevity swap in the next three years.

While the quotation and execution process for these transactions is now a well-trodden path, given the volume of schemes exploring their risk management options, insurers and reinsurers still have operational constraints which will prevent them quoting on every deal in the market. In order to get the right outcome in a busy market, it is important for schemes to manage their approach carefully and consider a more targeted approach and a clearly articulated price target. This is particularly important for smaller schemes, when a number of large deals are likely to be driving activity in the market again in 2021.

We expect another year of high activity despite the funding hits some schemes experienced as part of the market volatility associated with the pandemic, with around £30bn of bulk annuities traded and £25bn of liabilities covered by longevity swaps.

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Louise Nash
Director

Senior Director, Transactions

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