Risk transfer solutions: Opportunities in the UK pension risk transfer market
‘A look ahead to 2023’ download our full report below
In the UK pensions risk transfer market, 2022 has been a year characterised by the increasing affordability of insurer buy-ins and buy-outs. As government and high-quality corporate bond yields increased, the cost of executing risk transfer transactions fell – and to historically low levels.
Even before the market turmoil we witnessed at the end of September, many pension schemes that had previously viewed insurer buy-out only as a distant prospect found themselves able to transfer significant portions, if not all, of their liabilities to insurers. Consequently, buy-in activity in the first half of this year increased 50% on the same period last year. This trend has continued over the second half of the year to date, albeit we expect a number of the large (£1bn+) transactions in the market at the moment will slip into 2023. In addition to these financial factors, recent reforms to the regulations that govern UK insurers could have a moderate, positive impact on insurer pricing.
Current attractive insurance pricing not only provides opportunities to mature, well-funded schemes, but also those that are less well funded.
Adolfo Aponte, Managing Director
Alongside traditional buy-in products, financial institutions are still trying to innovate through a range of alternative offerings, designed for schemes for which buy-out may be unaffordable in the near-term.
However, challenges exist
While capital sourcing and allocation has been relatively unconstrained for insurers recently, human capital has been a scarcer resource. Drawn by improved affordability, many schemes have come to the market at same time, and insurers and brokers simply haven’t had the bandwidth to process the level of demand. Consequently, transaction lead times are lengthening, reducing schemes’ ability to take advantage of the current attractive pricing window.
Also, the cost of raising capital (through new hybrid debt issuance) is on the rise. So, while insurers are currently well capitalised, those looking to raise further capital in the near future may well experience a higher cost of borrowing than in the recent past.
The recent LDI crisis that impacted the UK DB sector highlighted the importance of liquidity management. While insurers are generally better placed to deal with liquidity pressures, there is still a lesson to be learnt: investment strategies that tie up funds in illiquid assets over the medium-to-long term may not provide the flexibility required to react to volatile economic
environments. In this case, the risk posed by illiquid assets is that schemes are unable to capitalise on a potentially short-lived opportunity to transact with insurers at historically low prices.
Counterparty risk is higher now than in the recent past
Finally, it is important for schemes to remain aware that no risk transfer solution is risk-free – they are not designed to be as such. Indeed, given the current macroeconomic, market and regulatory uncertainty, insurer counterparty risk is higher now than it has been in recent years. Consequently, schemes need to give counterparty risk due consideration when exploring
insurance options and selecting an insurer/provider with which to transact.
A look ahead to 2023
A year of reflection, consolidation and strategies.
A look ahead to 2023
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