At the time, it forecast the overall volume in 2022 would be between £30-£35bn, which would be the second largest ever in a year in the UK.
However, there are more than £2tn of defined benefit pension liabilities that could be transferred to insurers over the next 20 years. Demand from pension funds exceeds supply. The question is whether insurers are able to step up to meet the demand.
With a core of active market participants in the UK, the availability of capital is not the issue.
Potential deterrents historically, however, have been the regulatory regime, the high market entry barriers, the limited credit asset universe and the time and bandwidth needed to get deals done.
Solvency II reforms
Elements of the proposed Solvency II reforms in Autumn 2021 would have added to this list of possible deterrents – a reason we have been working closely with the Association of British Insurers to identify and quantify likely impacts.
We welcomed the latest consultation response from HM Treasury, which “drops” the most onerous elements of the proposed reforms.
While the devil is in the detail, we think overall that proposed changes, such as the reduction in the risk margin, will increase capacity for insurers.
Widening the universe of assets with highly predictable cash flows may help match longer-duration liabilities.
On asset eligibility, private assets held by some pension schemes may be more palatable as an in-specie transfer on buy-out, which may be attractive to all parties.
So we remain positive that 2023 and beyond will continue to see high volumes of bulk annuity activity, including new entrants into the UK market.
Since the Covid-19 pandemic struck, we have observed diverging industry views on longevity.
The reason the different interpretations of the data between insurers, reinsurers and pension scheme actuaries matter is that they can lead to price dislocation and bulk annuity trading inefficiencies, including in some cases risk transfer deals not going through.
So, it would be in all market participants’ interests to discuss potential disparities in longevity assumptions early on in a process.
Supply and demand
The current decumulation market is experiencing a number of supply and demand issues. Prominent among them is that many insurers are refusing to provide quotes for smaller schemes or will only do so if they have exclusivity.
At the other end of the scale, while affordability for larger schemes has improved, deals are taking a long time to execute.
A lingering issue across all parts of the market is data quality; many pension schemes do not meet the standards insurers would like.
