By Kunal Sood, Managing Director of Defined Benefit Solutions & Reinsurance at Standard Life
More mega-transactions
The market is already busy with large schemes up to c. £2bn in size. However, given the economic environment and persistently high inflation, very large schemes have also benefited from the rise in interest rates, and are now increasingly focused on de-risking, with some of the UK’s largest schemes now engaging with the BPA market. This development means that what we typically consider sizeable transactions – at around the £3-5bn mark – could become BPA ‘bread and butter’ over the next couple of years, with much larger transactions on the horizon.
The illiquid assets issue and deferred premiums
Illiquid assets continue to be a key consideration in planning for buyout, as the sudden surge in scheme funding levels has meant that many schemes are in a buyout surplus sooner than anticipated but without the liquid funds required to pay a bulk annuity premium.
These are currently presenting in the market, with increased numbers of schemes requesting a deferral of premium over periods of up to two years. However, other solutions are also available to help manage illiquid assets. In some cases, the insurer may be able to accept the assets in-specie, however this is often not the optimal solution for a scheme so it’s worth exploring whether selling or restructuring these assets could lead to a better outcome. Ultimately, for schemes in this position, it is worth having a strategy in place for how to manage illiquid assets if the journey to buyout has been considerably shortened.
Full scheme transactions
In previous years, a phased buy-in approach was commonplace as many schemes looked to secure their liabilities in tranches. However, since the end of last year, there has been a shift, largely driven by the improvement in funding levels, while liquidity issues led to a number of partial buy-ins being put on hold. In 2023, this has meant over 90% of deals coming to market have been full scheme transactions and we expect to see this trend continue throughout 2023.
Capacity and the importance of preparation
There is considerable appetite within the de-risking market right now, but there is finite capacity within the industry. With demand at increasingly high levels, preparation for buyout continues to be a vital factor when it comes to a scheme’s de-risking journey. For those schemes with accelerated funding levels, the choice may be between whether to look to secure a bulk annuity transaction now, or pause and invest in the administrative and preparatory work. Standard Life encourage trustees and their advisers to give the preparation the attention it deserves, as this will help secure the best opportunity in what is set to remain an extremely busy market.
The regulatory environment
Following the publication of recent DWP consultations on superfunds and the potential for an expanded remit for the Pension Protection Fund, the regulatory environment will remain key on the agenda during the second half of the year.
As with all proposals, the focus should be on creating the best outcomes for members, and bulk purchase annuity deals have proved to be a hugely successful innovation that have helped secure the pension benefits of millions of DB scheme members. Any potential changes will need to be carefully developed and targeted with this at front of mind.
Conclusion
Demand in the de-risking market has met expectations in the first half of 2023, with volumes of c. £20 billion already announced this year. Given this landscape, it seems inevitable that the £43.8bn record set in 2019 will be beaten this year.
Looking ahead to the rest of the year, there are no signs of activity slowing down, and we expect that next year will be a continuation of the same, with high levels of demand for insurer attention.
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