Despite the wider uncertainties, 2020 is still shaping up to be another busy year for risk settlement, with pension schemes of all sizes seeking to secure members’ benefits. Analysis from Aon shows that over
£6 billion of bulk annuity transactions have already been completed. Of this, Aon has acted as lead adviser on around £3 billion of transactions, ranging from £10 million to £1 billion, including transactions for the Co-operative Pension Scheme and the Leonardo Electronics Pension Scheme.
Mike Edwards, partner in the Risk Settlement team at Aon, said: “Over the last two months, and with financial markets volatile due to the still developing COVID-19 situation, Aon has seen a range in some cases of over 10% on the best to worst pricing on individual transactions - over double what we might expect in a more typical market situation. In addition to that, the pricing levels from individual insurers have been highly variable from transaction to transaction.”
Aon’s analysis of pricing and views from insurers is that this wider disparity in pricing reflects a number of factors including:
• The variety of insurer pricing investment strategies - and particularly the proportion they invest in corporate bonds;
• The sourcing capability of individual insurers to buy corporate bonds at prevailing yields, given reductions in market liquidity;
• A range of views on how much of increases in credit spreads relates to increased risk of defaults.
Mike Edwards continued: “Current market conditions may be creating significant differences in pricing between insurers on individual deals, but the best pricing captured is still among some of the most attractive seen in recent years.
"With this recent pricing volatility, schemes might question whether they should wait for current uncertainties to lessen before approaching the market. But our experience - including over the last month in which we have still completed around £1 billion of transactions - is that if schemes are ready to transact they are better off being ‘in the market’.
“Volatility is doubled edged - it can lead to very attractive pricing opportunities and it can often be short-lived. It is also important for schemes to work with an adviser who understands which insurers are most relevant for their transaction and then to target their market approach accordingly.”
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