Consultants expect that at least £30 billion in risk transfer deals will materialize across the U.K. over the course of 2021
The risk transfer market in the U.K. will continue to flourish in 2021 as an increase in U.K. long-term interest rates in the first quarter resulted in improved funding levels for many defined benefit funds, consultants said.
Over the course of 2021, consultants expect that at least £30 billion in risk transfer deals will materialize across the U.K. The ultimate opportunity set could be closer to the £60 billion mark, conditional upon some plan sponsors moving ahead with exceptionally large longevity swaps and buy-in transactions or alternative strategies such as capital-backed journey plans, consultants said.
But the year will belong to buyouts, consultants believe, as insurance companies have been improving their capabilities and capacity to insure the liabilities linked to plan participants that are yet to retire, known as deferred participants.
My expectation is that 2021 will be another busy year. It is hard to predict exact volumes, which can be swayed one way or the other. My best guess today is that we will see similar volumes to last year in excess of £30 billion, said James Mullins, partner and head of risk transfer at U.K. consultant Hymans Robertson LLP in Birmingham, England, referring to the buy-in/buyout opportunity set.
The value of buy-ins and buyouts in 2020 was £31.8 billion, while a record £24.2 billion in longevity swaps drove the total deal value to £56 billion.
Hymans Robertson’s Mr. Mullins, who noted that an increase in the number of plans moving to a buyout could be in the cards this year, said the last few months have been very positive for pension funds due to improving funding levels combined with an improved ability to afford risk transfer.
We will see more and more schemes being able to afford insuring all of their liabilities, he said, adding that plans could move with buyouts outright or could continue their derisking journey to a full buyout under existing buy-in contracts. Under these so-called umbrella contracts in the U.K., plan sponsors pre-agree terms with insurers for future risk transfer deals, allowing them to move quickly when market conditions are advantageous for such transactions.
Schemes that have already done buy-ins are ahead of the game on risk management and they on average tend to have better funding levels, Mr. Mullins said.
Gavin Markham, partner and head of bulk annuities at U.K. consultant Barnett Waddingham LLP in London, agreed with Mr. Mullins that 2021 volumes could reach between £30 billion and £35 billion as the financial positions of U.K. plans have improved in the first quarter of the year. Schemes may not have been as well-hedged against the movement of interest rates. That position would have moved favourably for them, he said.
Over the first quarter of the year, long-term interest rates have risen significantly with gilt/swap yields increasing by around 60 or 70 basis points and were back toward the levels at the start of 2020, Mr. Markham noted.
Fifteen-year gilt spot rates were 0.5% as of Dec. 31, and have since more than doubled to 1.2%.
In addition to improving funding levels, deal pricing continues to be favourable for U.K. plan sponsors, consultants agreed, even if discounts found in the second quarter of last year are no longer available.