Record year predicted for DB de-risking market as 2022 demand spills over

The defined benefit (DB) pensions de-risking market is expected to see one of its biggest years on record, according to analysis from WTW, with at least £40bn in bulk annuity transactions and £20bn in longevity hedges predicted to be completed.

WTW’s report, Shifting up a gear – de-risking report 2023, suggested that the improved funding positions following the 2022 gilt market volatility, alongside some of the cheapest pricing in over a decade, means that 2023 could see a record volume of deals.

Furthermore, although past years have seen a slower start in the risk transfer market, with most deals transacting in the second half of the year, WTW predicted that the momentum from the end of 2022 will spill into early 2023 and lead to "a more even pipeline" of schemes looking to transact throughout the year.

However, WTW clarified that the reduced scheme liabilities are also expected to result in lower average liability values being de-risked compared to previous years.

Commenting on the report, WTW pensions transactions managing director, Shelly Beard, stated: “The bulk annuity and longevity hedging markets continue to be busy with demand from late 2022 spilling over into 2023.

"The rising gilt yields, along with improved insurer pricing due to widening credit spreads and improved longevity reinsurance pricing has resulted in some schemes seeing an improvement in buyout funding levels to the extent that buyout is now within reach much earlier than anticipated.

“We have also seen a significant increase in the number of full scheme buy-ins and this trend is expected to continue in 2023."

Indeed, Beard explained that the increase in gilt yields, widening corporate bond spreads, and improved longevity pricing seen in 2022 resulted in many pension schemes being closer to a full-scheme buy-in than expected, with this expected to be the "dominant type of transaction in 2023 and beyond".

“Furthermore, with some schemes no longer having the liquidity to undertake partial buy-ins, some trustees will prefer to undertake a single full scheme transaction rather than a series of partial buy-ins, given the absolute size of their scheme has now reduced due to higher yields," she stated.

The improved funding levels are also expected to see an increasing number of schemes looking to become transaction ready, with Beard highlighting investment strategy and strategic data cleansing as two areas that are "particularly important in order for schemes to be able to move quickly".

In addition to this, Beard suggested that the increased demand may mean insurers will need to focus their propositions on more than just price in order to remain attractive in the market.

She continued: “Many will already be planning enhancements, such as providing a wider selection of investment vehicles for members’ additional voluntary contribution pots, enhancing their residual risk proposition to cover the risk that incorrect benefits have been insured and improved member interface tools.

"These enhancements are likely to drive significant innovation in the market this year.”

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