The revised Solvency UK package published in late 2022 was generally well-received by insurers. Whilst the precise details of the Risk Margin reduction, additional flexibility for the Matching Adjustment eligible assets and notching in the Fundamental Spread calculation are still to be confirmed, the consensus is that the changes will help to ease capital pressure on this business.
Further to this regulatory change, the impact of the LDI crisis combined with higher interest rates has improved the funding position of most pension schemes, as well as the attractiveness of retail annuities. These three factors combine to make 2023 likely to be an extremely busy year across the retail and institutional market.
This activity is not just a question of ‘the same, but more’. We believe that these developments will motivate insurers to invest and innovate in retail annuities and to consider new retirement income products.
On the retail side we are already seeing the fruit of innovation with new products aiming to improve policyholders’ retirement income, including catering for changing needs in later life. This aligns with consumers’ increased focus on secure and flexible retirement income products as working patterns change, along with a desire for a better policyholder experience.
Continuing the trend we saw in 2022, new entrants into the UK bulk annuity market (domestic and foreign), as well as existing writers, are revising their business plans in the light of the healthy market opportunities. Global reinsurers have welcomed the reforms and are considering ways to improve their reinsurance offering and increase their capacity for funded reinsurance including creative new products and structures to hedge both longevity and credit risks from UK insurers.
For the pension scheme buy-in/buy-out market, with the LDI crisis now behind us, the impact of increased interest rates has resulted in many schemes being fully funded on a buyout basis. As such, from a sponsor's perspective, it's now a very appealing environment to pursue a full scheme buy-in or buy-out transaction. We expect to see more full scheme buy-outs, but also full buy-outs (with an all-risks transfer) – and with somewhat different criteria from before.
Rather than just looking at price, trustees are increasingly concerned about the overall member experience (especially for deferred pensioners), as well as the insurers’ ESG credentials. The good news is that the insurance market has the capacity, with insurer balance sheets having proved resilient through the market turbulence, and solvency positions having reached record highs in the second half of 2022. 2023 may be the year we see mega-deals buy-out becoming almost common.
We should also point to the arrival of a new type of pension, the Collective Defined Contribution schemes (CDCs). WTW worked with the Royal Mail scheme, and this is expected to open to accrual soon. The objective of this new product is to enable an alternative to existing defined benefit (DB) and defined contribution (DC) pension schemes, seeking to:
With a blank canvas regarding the design and provision of the retirement income, member engagement, underwriting and income stream perspective, these are exciting times. At WTW, we believe this gives us the opportunity to learn from other retirement products to optimise the member experience and outcome, designing retirement income options that improve member engagement.
We expect a resurgence of retail annuities, in accordance with the lower-capital, higher interest rate world. But part of this resurgence will relate to product innovation. Examples are:
In addition to these specific innovation angles, the whole field of longevity pooling is generating increasing interest. This is already well established in markets such as the U.S. and Australia and is starting to gain traction in the UK as a potential retail decumulation option that appeals to some pensioners.
Of course, pooling of risk is hardly new to insurers. The difference here is that members pool their retirement funds and, for insurers, it can offer a way to spread systemic longevity risk.
Although there is no guaranteed income, each year the pool members receive payments based on their probability of surviving. Further benefits of pooling are that members enjoy investment returns and, in effect, they gain mortality credits from members who die. Moreover, after 10 to 15 years, surviving members also receive a regular annuity based on accumulated funds to avoid the tontine effect – where a large windfall would go to the last survivor.
The recent changes to Solvency II, enhanced by the current economic environment of relatively high interest rates, gives insurers and pension schemes (including CDCs) the opportunity for an excellent year both in terms of business volumes and the quality of the products and services offered. It’s an exciting time to be writing business in this market.
