UK pension risk transfer market predicted to stabilise in H2 2021

Both the US and UK pension risk transfer (PRT) markets have a “robust deal pipeline” for H2 2021, analysis from Legal & General (L&G) Retirement Institutional has found, with UK markets expected to hit an annual market volume of £25bn.

The group's cross-market PRT monitor predicted accelerating transaction volume, particularly in the US market, which is expected to reach a record-breaking annual market volume of £22bn-29bn, despite experiencing a slowdown amid the pandemic.

Although the US PRT annual volume dipped to around £21bn in 2020, L&G's monitor has suggested that the market is experiencing a “strong rebound”, with the volume for the first half of the year growing more than 26 per cent to £6bn, up from £5.3bn in 2020.

Whilst UK markets did not experience such a significant downturn in 2020, with pension longevity risk transfers reaching a record £55.8bn, L&G acknowledged that there were fewer 'jumbo' £1bn plus transactions that were seen in 2019.

However, the group noted that the trend towards opportunities for smaller and mid-sized pension schemes has continued, with a "pronounced uptick" in quote activity emerging suggesting that the second half of 2021 will be “very busy”.

The monitor also suggested that if interest rates rise from their near-record lows, unhedged plans will see their funding status improve as liabilities decrease, making PRTs more attractive, which may allow schemes with clear objectives to secure a competitive deal.

More broadly, the monitor suggested that interest in PRTs remains strong in both the US and UK markets, and that competition among insurers is “fierce” as the economic recovery continues.

Furthermore, while the US market had 19 active insurers, and the UK only eight active insurers, L&G's monitor suggested that there has been a similar level of competitive tension within the majority of insurers targeting specific transactions.

Commenting on the latest analysis, L&G Retirement Institutional head of new business, John Towner, stated: “With the improvement in pension plan funding levels this year, we continue to see strong demand in both the UK and US for pension risk transfer.

“Sponsoring companies in both countries are increasingly looking to insurers to take on responsibility for their pension obligations and help them reduce their pension exposures.

“We are expecting a very strong second half of the year in both the UK and US with a number of large transactions coming to market”

L&G Retirement America president, George Palms, added: “The level of activity and demand in the US market today should put to rest any lingering concerns about the pandemic’s long-term effect on this industry.

“The interest rate and market volatility the world has experienced over the past 18 months seems to have only reinforced for corporate managers the value of mitigating pension risk”

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