Our predictions for 2022: what’s on the cards for the de-risking market?

Considering how unpredictable the past couple of years have been, it’s with a deep breath that we put pen to paper (or fingers to keyboard) and make predictions for 2022. What will this year hold for schemes, the buy-in and buy-out market, and insurers?

Our crystal ball suggests that 2022 has plenty of exciting developments in store which should benefit pension schemes: it could be the year that sees ‘mega’ transactions breaking the transaction size record – certainly insurers have the capacity and appetite. We also expect to see a shift in market dynamics with the first superfund transfer completion, new insurer accounting standards coming into force and continuing fierce competition between insurers.

Trends and dynamics shaking up the market in 2022

The UK’s buy-in and buy-out market enters 2022 with considerable momentum. Our analysis suggests that 2021 had a near record close to the year with around £20bn of buy-ins / outs completing in the second half. Total volumes for 2021 are set to reach nearly £30bn after a relatively subdued first half at £7.7bn (including c£1bn of Assured Premium Products written by L&G).

As set out in our pensions de-risking report late last year, we predict a potential wave of demand of up to £650bn of buy-ins and buy-outs over the next decade. Volumes could reach between £30-50bn each year up to 2025 with the potential for significantly larger volumes beyond 2025 (or earlier if employers accelerate cash funding to support transactions). We expect 2022 to be in line with this trend of £30-50bn pa (now the pandemic is largely behind us), with insurers reporting heathy pipelines.

Could we see a shake-up in the insurer market leaders this year? Legal & General, Pension Insurance Corporation (PIC) and Rothesay have dominated the market since it first reached volumes of £10bn in 2014. Aviva has broken into the leading group over the last couple of years, with Aviva on track for a market share of over 20% in 2021. Standard Life has been growing its proposition and we expect to see an increased presence in the market.

Insurer capacity has also increased going into 2022. In particular, several insurers now have the appetite and capability to write £10bn+ transactions and we believe we could see the transaction size record of £4.7bn broken.

From next year (2023), insurers will report under the new IFRS17 accounting standard with potentially significant changes to the way that insurers account for bulk annuity business. The transition into the new accounting regime has the potential to affect market dynamics and appetite later this year ahead of its introduction.

The first superfund transfers may also provide additional market capacity this year. The Pensions Regulator (TPR) gave Clara Pensions the green light in November 2021 and we expect to see the first superfund transfers this year. Under TPR’s guidance such transfers will be largely restricted to schemes with stressed sponsors where full buy-out will not be feasible. So, for the time being, superfunds are likely to remain a relatively small part of the overall risk transfer market but it's certainly a space to watch.

What does all this mean for schemes?

The good news going into 2022 is that insurer capacity for buy-ins and buy-outs is growing with strong price competition between insurers. After a near record-breaking second half to 2021, we expect activity to continue at sustained high levels in 2022, reaching £30-50bn for the year.

Schemes seeking to manage longevity risk would be well advised to have a clear strategic plan in place with practical steps on their journey. Consider if there are opportunities to take down risk on attractive terms through a buy-in for part of their liabilities, regardless of whether that is part of a self-sufficiency strategy or a goal to reach full buy-out over time. Changing market dynamics as insurers vie for transactions and continued market volatility could provide attractive pricing windows over 2022.