Aon plc (NYSE: AON), a leading global professional services firm, has said that the market for buying-out UK defined benefit pension schemes continues to grow, even though it has seen several changing dynamics in the past 18 months.

Martin Bird, senior partner and head of Risk Settlement at Aon in the UK, said:
“By the end of 2023 it’s quite likely that the total annual volume of deals in the risk settlement market will be in the region of £50 billion. But the drivers for that number – a record year – are changing as we move into 2024. The downward change in liabilities over the last two years due to changes in interest rates and the corresponding impact on funding levels, means it’s likely that there has been a disproportionate effect on the number of deals taking place in the market.

“Aon’s latest Global Pension Risk Survey confirmed what we probably already knew from interacting with clients – that 55 percent of schemes are targeting buyout. With schemes ever aware of the need to navigate new forms of volatility, insurers are increasingly seen as a safe haven – and many sponsors simply want pensions off their balance sheets.”

Martin Bird continued:
“We are also aware that most of the pipeline – both for the remainder of 2023 and into 2024 – is for full scheme deals rather than pensioner-only buy-ins. That reflects how affordable buyouts have become for schemes as well as the concern that partial buy-ins can result in too much collateral or leverage risk for the rest of a scheme post-deal. But that also means that the complexity and resources needed to do this work have increased rather than lessened. Whether it’s sourcing longer duration assets to support transactions, dealing with the greater complexity of benefits and member choice that come with full scheme projects, or managing the operational and implementation challenges of moving from buy-in to buyout and winding up the scheme, full scheme projects require more time and a carefully planned process to ensure successful outcomes.
“In addition, developing a strategy for managing ’residual risks’ features prominently in full scheme projects, whether that’s through a process to obtain insurance cover or using surplus and sponsor indemnity provisions. Again, careful planning is essential to ensure that this is incorporated early in the project.”

Nevertheless, as has been evident in the post-pandemic period, other factors are now affecting how smoothly the market is running and how easily schemes can be brought to it and through it.

John Baines, partner in the Risk Settlement team at Aon, said:
“The biggest constraint continues to be people resource. There are still only so many people who have the capability to understand and handle these transactions, so insurers are not only needing the right people to do complex work but also having to prioritise where to spend their time pricing and executing deals. They can’t chase everything.
“Bear in mind that insurers have a lot to assess when a scheme approaches them – from the quality of a scheme’s data to the suitability of its assets for moving to buyout. But, having said that, with the market as competitive as it is, we are still seeing attractive pricing. Additionally, there is the now normal end-of-year rush to close transactions – but the pipeline from this summer would indicate that Q1 and Q2 of 2024 are going to be just as busy.”

John Baines continued:
“The market for smaller schemes presents other issues for the insurers, notably the need for a streamlined process to enable easier pricing and execution of deals. Insurers are, understandably, driving for early exclusivity – they don’t want to be up against other insurers chasing a small deal and potentially wasting time and resource.

“But to some extent, there are also encouraging signs. New insurers are coming to the market, most notably M&G’s re-entry to the market earlier this year, and there are other large players busy getting ready to launch solutions. That said, while there has always been talk of this, new entrants have been slow to emerge. And there are good reasons for that, as aside from just assembling a suitable team and structure, there are – rightly – many regulatory hoops to get through.”