Mega-transactions to 'dominate' H2 de-risking market activity

Written by Sophie Smith

31/07/2023

Mega-transactions are set to dominate the de-risking market during the second half of 2023, alongside deferred premiums and full-scheme deals, Standard Life has suggested.

Standard Life managing director of DB solutions and reinsurance, Kunal Sood, pointed out that while the market is already busy with large schemes, very large schemes have also benefited from the recent rise in interest rates, and are now increasingly focused on de-risking.

Given this, he suggested that sizeable transactions at around the £3-5bn mark could become the ‘bread and butter’ for the bulk purchase annuity market over the next couple of years, with much larger transactions on the horizon.

In addition to this, Sood argued that there has been an increase in full scheme buy-ins, revealing that 90% of the deals coming to market in 2023 have been full scheme transactions, a trend that is expected to continue throughout 2023.

Amid this push towards de-risking, pension schemes have placed an increased focus on illiquid assets, as Sood explained that the sudden surge in scheme funding levels has meant that many schemes are in a buyout surplus sooner than anticipated, but without the liquid funds required to pay a bulk annuity premium.

"These are currently presenting in the market, with increased numbers of schemes requesting a deferral of premium over periods of up to two years," he explained.

“However, other solutions are also available to help manage illiquid assets. In some cases, the insurer may be able to accept the assets in-specie, however this is often not the optimal solution for a scheme so it’s worth exploring whether selling or restructuring these assets could lead to a better outcome.

“Ultimately, for schemes in this position, it is worth having a strategy in place for how to manage illiquid assets if the journey to buyout has been considerably shortened.”

Illiquid assets are not the only consideration for those planning for buyout, as Sood argued that while there is considerable appetite within the de-risking market right now, there is finite capacity within the industry.

“With demand at increasingly high levels, preparation for buyout continues to be a vital factor when it comes to a scheme’s de-risking journey,” he continued.

“For those schemes with accelerated funding levels, the choice may be between whether to look to secure a bulk annuity transaction now, or pause and invest in the administrative and preparatory work.

"Demand in the de-risking market has met expectations in the first half of 2023, with volumes of c. £20bn already announced this year. Given this landscape, it seems inevitable that the £43.8bn record set in 2019 will be beaten this year.

“Looking ahead to the rest of the year, there are no signs of activity slowing down, and we expect that next year will be a continuation of the same, with high levels of demand for insurer attention.”

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