UK pensions consultants expect 2024 to be another record-breaking year for the pensions risk transfer market with transactions surpassing 2023 levels.

The final figures for 2023 are yet to be published. However, it is widely expected that there were circa £50bn in deals, which would brand 2023 as a record year for pension risk transfers, compared with the previous high of £43.8bn in 2019.

UK pensions consultants expect this trend to continue.

WTW expects pension risk transfer volumes to reach £80bn, with insurers primed to buyout £60bn in bulk annuity transactions and £20bn in longevity swaps this year.

Jenny Neale, director in WTW’s pensions transactions team, said: “It’s clear that funding improvements have turbo-charged the pensions de-risking market and, from a capacity perspective, we have already seen that the insurance market is capable of scaling up to meet demand.”

She added that the attractiveness of these opportunities is also enticing new insurers to enter the market adding additional capacity, which she believes will be sufficient to meet requirements in the year to come.

At the beginning of the year, LCP said that two new players are expected to enter the UK buy-in market in 2024.

Aon, Hymans Robertson and LCP expect that 2024 will see similar levels to those in 2023.

Martin Bird, senior partner and head of risk settlement at Aon, acknowledged that the final figures for 2023 are yet to be published, but he expects the total volume of transactions to reach circa £50bn.

He said: “We see no reason why 2024 will not see similar levels, if not even more, as strong demand for insurance de-risking solutions persists across the market.”

Bird added that with so many mega deals above billions of pounds being taken to market, it creates more risk of “lumpy” volumes from year to year.

He explained: “For example, it only takes one £5bn deal to have a 10% impact on total volume figures, so it would not surprise us if volumes are materially higher and we believe the market has sufficient capacity to manage this in 2024.”

James Mullins, partner and head of risk transfer at Hymans Roberstson, agreed that 2024 is shaping up to be a year of unprecedented change for the risk-transfer market, which he said is presenting opportunities for well-prepared pension schemes.

He said that the expected entry of two new participants to the market will increase competition for smaller and medium-sized pension schemes.

He also pointed out that there is an “early mover” advantage for the first few pension schemes to transact with a new entrant in the buy-in market, as the insurer could accept a lower margin to help build up its credibility.

At the larger end of the market, Mullins said that more insurers are demonstrating that they have the capability and appetite to complete record-breaking transaction sizes.

“Insurers also currently have access to a large amount of capital, which increases their capacity for transactions of all sizes. This gives the potential for all insurers to complete record transaction volumes during 2024,” he noted.

Mullins also expects to see more superfund transactions, since Clara-Pensions announced its first superfund deal with Sears Retail Pension Scheme in November 2023.

He said: “This, along with increased activity for capital-backed journey plans, means that we expect 2024 to be seen as a coming of age for the alternative risk-transfer market.

“We also expect to see more use of innovation, such as captive insurance solutions. These allow the sponsoring employer to benefit as the pension scheme runs off within an insurance wrapper,” he added.

Mansion House reforms

Neale acknowledged that despite the increased demand for de-risking, the UK’s Chancellor of the Exchequer’s proposed Mansion House reforms could give pause for thought for some pension schemes and their sponsoring employers.

In July 2023, chancellor Jeremy Hunt announced plans to unlock up to £75bn of additional investment from UK pensions schemes.

This included proposals to make it easier for well-funded defined benefit (DB) schemes to run on and build surpluses.

As part of these reforms, the government is consulting on whether changes to rules around when DB scheme surpluses can be repaid, including new mechanisms to protect members, could incentivise well-funded schemes to invest in assets with higher returns, as well as reducing the authorised surplus payments charge from 35% to 25% from 6 April 2024.

WTW’s Neale said: “While we expect buyout to be the long-term destination for the majority of our clients, we have seen a number of schemes with strong sponsors initiating a fresh review of their long-term target and more schemes may choose to seek value in running-on their pension scheme and delaying their move to buyout if a change in legislation allows easier use of any surplus run by the scheme.

She added that if this were the case, it is unlikely that these schemes would wish to run unrewarded risks and consequently could look to hedge their demographic risks through the use of longevity swaps.

Bird said that Aon saw limited impact on the bulk annuity market to date.

“In fact, it’s quite the opposite, as more and more schemes are keen to capture attractive insurance solutions while they are viable and with many sponsors prepared to cash any shortfalls once schemes come within cheque-writing distance,” he said.

He added that Aon’s 2023/24 Global Pension Risk Survey of UK DB pension schemes showed 55% of schemes now have buyout as their long-term target.

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