It’s no secret that 2023 has seen a significant shift in the dynamics of the bulk annuity market. Increased demand from pension schemes arising from funding level improvements, coupled with insurer resource constraints mean that insurers are being more selective on deals they will quote on, and are pushing for more streamlined and standardised processes. In this article we consider how the bulk annuity market is reacting to these pressures and what pension schemes can do to put themselves at the front of the queue with insurers.
The first half of 2023 has been the busiest ever in the bulk-annuity market, with transactions of the order of £21bn written in the first six months of the year. This trend has continued into the second half of the year with the market operating at, or around, capacity, and we expect the total volume of bulk-annuity business written in 2023 to eclipse the previous record of £43.8bn in 2019, even allowing for the significant fall in deal sizes as a result of the rise in risk-free rates.
We see no signs of any slowdown in demand from pension schemes as funding levels continue to hold up, and many schemes who have been using this year to get “transaction ready” are expected to approach the market in early 2024.
In the face of this unprecedented demand, insurers are focusing their efforts on processes that: (1) they think they have the best chance of winning; and (2) they perceive offer a smoother route to execution. The latter will reflect the insurers’ views on complexity of benefits, scheme governance set-up and the design of the quotation process.
With a changing market, schemes need to be adaptable and the “one size fits all” approach that may have been adopted for quotation processes in the past is no longer appropriate. Instead, the market approach is likely to vary depending on scheme circumstances and in particular size and complexity. Having a transaction adviser who has experience of the current market, thinks strategically and is in close contact with insurers is critical to designing a quotation process that will optimise the outcome for the scheme.
Key attributes that are important in this are:
Historically one of the most important factors in optimising bulk annuity pricing was the timing of approaching the market. For example, in prior years we have achieved excellent results for clients who were able to act quickly to take advantage of increased insurer appetite towards the end of the year, where we knew they were below their new business targets. With market peaks and troughs no longer so evident as previously given the consistently high current levels of demand, the prospects for such pricing opportunities are diminished and instead there can be an advantage in demonstrating flexibility to work with the insurer(s) to fit initial quotations around their resource availability, particularly for smaller schemes.
That said, whilst it can be beneficial to be flexible to get your foot in the door, once processes are kicked off insurers will want to see a clear timetable, with evidence of a governance framework that will facilitate agile decision-making through the transaction.
Insurers will prioritise transactions that take a focused approach to negotiation and are proportionate in the number of pricing rounds undertaken. Provided the right balance is struck, this does not adversely impact price or the wider commercial deal, and it is in everyone’s interests to minimise the time and expenditure that arises from unnecessary extensions to transaction processes.
Indeed, this principle isn’t new. WTW’s Streamlined Bulk Annuity Service for smaller transaction sizes has been successfully in place for several years and provides schemes with a low-cost, efficient route to market, whilst optimising the deal outcome.
In a similar vein, think about what information it is imperative to understand upfront, and what can wait until later in the process. For example, insurers are more likely to say no to quoting on a deal that asks for comments on a long list of commercial and legal terms as part of the initial quotation round, when the reality is that for most schemes this information is unlikely to be critical to decision making at this stage in the process anyway.
For deal sizes below £50m insurers will increasingly only provide a quote if there are no other insurers in the process. The insurer selection decision must therefore be made at the outset of the process. Whilst this turns the traditional process on its head, in our experience the outcome can be as good, if not better, than if a competitive process had been undertaken (particularly in the context of the current market). In particular it allows the insurer to focus resource on optimising the outcome and working with the scheme to overcome challenges as they arise, and the Trustee may be able to negotiate preferable treatment in exchange for exclusivity.
Again, having an experienced adviser and taking guidance from its Independent Professional Trustee means the Trustee can be confident it has considered all angles – for example member experience – before choosing who to partner with.
Current market capacity constraints have not yet got to the stage where schemes are unable to transact, should they wish to do so. However, should demand continue to increase, then all else equal this may be the case, particularly at the smaller end of the market.
In practice, we think this is highly unlikely as we expect insurers – both current and prospective providers – to react to take advantage of a highly attractive business opportunity in a thriving market.
Sources of additional capacity include:
01
M&G entered the market on a selective basis in 2023. Existing capabilities from the historic Prudential UK bulk annuity business enabled M&G to get off the mark quickly, and WTW recently led the first transaction written by M&G for the Northern Bank Pension Scheme. We expect a scaling up of M&G’s appetite in the bulk annuity market over the coming years.
In addition, long-standing market participants such as Scottish Widows, have re-stated their commitment to the market and a desire to increase business volumes, which should provide helpful additional supply to meet pension scheme demand.
02
The UK bulk annuity market offers an attractive opportunity for institutions looking to expand their offerings into different business lines or geographies. WTW is involved with a number of conversations with organisations considering entering the UK bulk annuity market. That said, the UK insurance market is designed to have high barriers to entry in order to protect security for consumers. Therefore, not all may reach the end of this journey to the market, but we would expect to see some capacity provided by new entrants over the next 1 – 5 years.
As we did with M&G, we are well placed to match new capacity to our clients at the appropriate time.
03
Bulk annuity providers are, across the board, currently holding significant capital over and above their target levels (which are significantly above the regulatory minimum levels); this excess capital could be used to write new business. Further, regulatory reform may reduce the levels of capital needed to be held and as each year passes capital is released from the insurer’s existing annuity portfolio – both of these give insurers even more scope to write new business. However, even if this capital is made available for new business, insurers will need to find a resolution to people constraints, particularly in their pricing functions. We are aware of investment across the market in technology and process improvements, which should hopefully go some way to freeing up resource in this area.
For the time being, maintaining our track record of only taking deals to market which we have high confidence will transact will help to ensure prioritisation of WTW cases by insurers
