De-risking market set to experience 'significant growth'

Schemes could have an opportunity to lock in recent gains via the de-risking market, which is set to return to “significant growth” this year, according to Aon, although gaps remain in trustee knowledge .

Aon’s Risk Settlement Survey 2022 showed that schemes’ timelines for buyout are gradually reducing, with more than 75 per cent of schemes surveyed intending to secure their liabilities within 10 years, while 30 percent are likely to pursue a bulk annuity transaction within the next 24 months.

In addition to this, the percentage of schemes that expect to be managing pension liabilities more than 10 years from now has almost halved compared to the previous survey, from 41 per cent in 2020 to 23 per cent.

Trustees and sponsors were also generally in agreement about de-risking plans, with more than half of respondents stating that both parties are supportive of de-risking actions, such as buy-in and buyout.

However, the survey also revealed gaps in trustees’ and sponsors’ knowledge about the de-risking opportunities available to them, as 57 per cent of schemes did not know how easy it might be to find a longevity swap provider.

In addition to this, around 8 per cent said they were not aware of superfunds, while a further 8 per cent were not aware of defined benefit (DB) master trusts.

Smaller schemes in particular were uncertain about the process, with 33 per cent of small scheme trustees stating that it would be difficult to find providers interested in offering a bulk annuity for your scheme, compared 13 per cent of medium and 8 per cent of large schemes.

Despite this, the report suggested that the "picture is bright" for small schemes, with a typical 5 per cent improvement in funding levels, suggesting that smaller schemes are getting closer to being able to buyout.

In light of this, Aon stressed that beginning a search early and appointing the right adviser will provide reassurance to those uncertain about the buyout process.

Commenting on the findings, Aon Risk Settlement Group partner, John Baines, said: “We are releasing this year's survey at a pivotal moment in the risk settlement market, with rises in yields meaning that buyout liabilities have typically fallen by over 20 per cent so far in 2022.

"This reduction in scheme sizes means that insurers will need to insure significantly more schemes – when measured on a like-for-like basis – in order to match their level of business in 2021. We know that most insurers in the risk settlement market are looking to grow, so there should be considerably more capacity in the market compared to 2021.

“The financial conditions that impact insurer pricing are also incredibly attractive, driven in particular by widening credit spreads. Combined with the additional capacity, this means bulk annuities are now looking particularly appealing for many schemes.

“But the market certainly has some challenges to deal with as it navigates new forms of volatility and the additional demand from pension schemes.

"We see the biggest challenge as being the human resource at insurers required to price, implement and operate insurance policies. This may have ramifications for how easily deals can be processed across the remainder of the year, with the best-prepared schemes continuing to benefit most.”

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