In 2019 it was predicted that the next decade would see pension buy-outs soaring, with Lane Clark & Peacock suggesting that the new phase of the pension buy-out market could see it swell from £5bn to £30bn in annual volumes by 2030. 2019 was record year for buy-ins and buy-outs but how has the turbulence of 2020 affected these predictions, and what other movements have we seen in the pensions market so far?
Changes to defined benefit schemes
Also known as final salary schemes, the defined benefit (DB) scheme market has undergone changes in recent times. As of May this year, 51% of DB schemes with more than £1bn in assets were closed to future benefit accrual for the first time, up from 33% in 2016. A prime example of the changes in this area is British Airways, which announced in 2017 that it was closing its DB and DC schemes to new accruals, establishing a new DC scheme. This is something we’ve seen echoed throughout the market, where companies are de-risking or looking for buy-ins and buy-outs. Another example is the £142m TI Group Pension Scheme buy-in with Aviva, which will insure and de-risk the DB pension liabilities of 1,224 pensioner members. Now, just 3% of large DB schemes remain open to new members, and equity allocation has halved in the past five years to make way for bonds and LDI assets.
Pension de-risking transactions continue to soar, with Willis Towers Watson finding two-fifths of pension schemes are expecting to complete a de-risking transaction within the next three years. Meanwhile, the longevity market remains extremely buoyant, ushering in more reinsurance and PE vehicles to the market. The longevity market should continue to be an attractive diversifier, leading to high capacity for longevity swaps into 2021 and beyond.
Small transactions take hold
This year we’ve seen a higher number of smaller transactions, which is in stark contrast to 2019. LCP reported that more than 75% of total volumes in 2019 was accounted for by just 11 transactions, whereas in 2020 we’ve seen much smaller deals dominate the market. The total value of UK deals almost doubled from 2018 to 2019, but last year was made up of 10 transactions over £1bn and five transactions over £3bn. We usually see around 150 transactions each year, although this is increasing year-on-year. As of July 2020, the total value of bulk annuity transactions in the UK was £12.7bn, which was down from 2019’s bumper year but up from 2018. This suggests that challenging market conditions triggered by Covid-19 are not impacting this sector as much as some might have thought and it looks on course to have another strong year.
Movement in illiquid assets
In March, the FCA announced changes to the permitted links rules, which removed restrictions on the types of illiquid assets life insurers and pensions funds can invest in. This has seen pension schemes encouraged to invest more in illiquid assets, including infrastructure, corporate credit, private placement and ground rent. With more companies chasing the same types of assets, pricing has become competitive. Investing pension schemes in illiquid assets helps to unlock private capital for infrastructure projects, as well as providing long-term equity-like returns and a diversified scheme portfolio.
The government’s Minister for Pensions and Financial Inclusion, Guy Opperman, says that the changes to the rules help “to encourage scale and innovation by pension schemes and help drive new important sectors of the economy”, and the pensions industry has largely welcomed the changes which will likely free up interest and support for illiquid assets and enhance investment strategy design.
Consolidators come to market
This year has been significant for consolidators coming to market, with the likes of Clara Pensions and the Pension SuperFund becoming increasingly active. After the Pensions Regular clarified its stance on DB consolidator regulation, we’ve seen the market open up and now all eyes are on how these new players will impact pensions. Punter Southall has also made a move into the market, launching Stoneport Pensions, a defined benefit scheme consolidator, to help small schemes reduce costs and risk and improve benefit security and governance. I am sure over the coming 12 months there will be further entrants into this market.
With Covid-19 highlighting a need for pension pooling vehicles to secure pensions long-term, there seems a clear opportunity for pension consolidation. However, UK defined benefit trustees will now need to meet new requirements established by The Pensions Regulator before their fun assets can move to consolidators, so it will pay to keep a close eye on new regulations in this space.
Hanover’s presence in the pensions market
Hanover has vast experience within the pensions and insurance space, working across consulting firms, reinsurers, insurance companies, pension funds and consolidation vehicles to ensure we know this market inside and out. If you’re a private equity firm looking to get into the pensions or insurance space, we can help to make market connections and industry relationships. We’re known for our consultative approach that is tailored to your business and requirements, and have a wealth of market intelligence we’d be happy to share.
