By Matt Richards, Head of Origination Structuring, Pension Insurance Corporation (PIC)
This was no small ask given that 2023 provided both the largest single transaction completed to date (RSA, £6.2 billion, February 2023), and the largest number of transactions completed that were over £1 billion in size each (11 completed in the year). With a total market value of £50 billion of pensions risk secured with insurance companies, 2023 marked the largest year for risk transfer to date.
It remains to be seen whether transaction volumes will beat last year’s, but with over half the year gone my prediction is that it will be “close, but no cigar” by premium amount, but a clear winner by volume of risks secured in the insurance sector by pension schemes.
What is interesting, is that although not every transaction is announced in the press, and Insurer half year results are still a month or so away from being announced so we can’t be sure on volumes completed in H1 of 2024, you could be excused for wondering how can it be possible that we would reach the same volumes of business as last year, with only a few announcements?
In the right place at the right time?
Having looked at the data for the last three years, and the expected transaction dates for this year – a clear trend is forming. More transactions are being back-ended into the latter half of the year. By my calculations, 50% of pension scheme liabilities were transferred to insurers in H2 of 2021, 60% in H2 of 2022 and 70% in H2 of 2023, and I don’t see 2024 being any different. So, what is driving this behaviour?
It is quite likely that some of this originates as a result of the annual cycle of work, budgets and projects. Trustees tend to submit pricing first round pricing requests to Insurers towards the end of Q1 (likely after approval at the first Trustee meeting of the annual cycle) with an intention to complete the project in Q3, or Q4 (with approvals targeted around the meetings towards the end of the year). This is a perfectly reasonable approach, but it does have an impact on the bunching up of transactions in the latter half of the year.
Further to that it has long been touted by some that there are “deals to be had” by waiting for a Q4 transaction, with “insurers looking to complete their annual volumes before year end”. This may have been true in some circumstances, but increasingly this opinion feels a relic of the past. In fact, over-filling the transaction timetable can lead to some schemes being crowded out and in the worst case could even lead to some smaller schemes struggling to receive as many quotes as they might have done at quieter points in the transaction calendar.
Consideration of timing of your transaction and the projected pipeline of insurers is almost as important as the size of your transaction for Trustees. Schemes that have been well prepared for a transaction and that are willing and able to flexibly adapt their processes at an opportune moment have been able to partner with a specific insurer to achieve great outcomes for their scheme.
Price is key but service is growing in importance
When talking about trends in BPA market, it’s worth noting a second; the shift in requests from partial buy-ins to full scheme buy-ins and buyouts. At the start of 2021, about half of the transactions that came to market were pensioner only, but now over 90% of transactions cover full scheme liabilities.
Favourable market conditions for pension schemes, and generous contributions by sponsors over years of deficit recovery have led to higher funding levels, and even surplus to buyout in many cases. As more schemes consider the transfer of the whole of their liabilities to the insurance market, they are taking a magnifying glass to the experience that their members can expect to receive, and what the journey to buyout, and transfer of administration will look like.
At PIC, our customers are at the heart of everything we do, and paying the pensions of our policyholders is our purpose. Critics may say that this is simply lip service, but having spent over 10 years at PIC, I know this to be fundamental to PIC, and to our success. From the very beginning, we have understood that exceptional customer service has to be the cornerstone of our story.
From the start, competing with household names, we knew that it would be the experience of our customers that would dictate our fate. Investing heavily into this space has paid dividends. There are numerous statistics that I could deliver, but significantly PIC is rated highest in the financial services sectors out of all our peers by the Institute of Customer Service. The Institute measures customer service across five areas: Professionalism; Quality and Efficiency; Ease of Doing Business; Problem Solving; and Timeliness. PIC scored over 87 out of 100 on each of these measures, making it a consistent leader across all elements of customer service.
Not all insurers can say that. It is this kind of information that Trustees are rightly scrutinising as part of their due diligence and selection process. As a result, we have had a number of clients that have selected PIC despite not being the cheapest, but because of the Trustees’ confidence in our ability to deliver.
Trustees have more to think about in a new world where surplus become more common than deficits. Higher funding levels means a longer list of potential transactions, and some consideration of when to come to market is becoming worthy of consideration in project planning meetings. Also, with a little extra cash in reserve, Trustees are rightly starting to consider whether non-price factors and member experience are more important than price, and a number of schemes have done just that. When it comes to people’s pensions and retirement, it is not a race to the bottom. Price may always be key, but high-quality service and customer experience are critical.
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