Aon: longevity risk remains a key concern for pensions market

In 2021, the UK bulk annuity market is expected to see a combination of new schemes exploring deals, alongside a backlog of 2020 auctions that were paused but may yet be restarted, according to Aon.

The predictions were made as part of its Q1 UK Risk Settlement bulletin, which looks back on the UK bulk annuity market in 2020 and provides an update on the 2021 market outlook.

Aon said it expects that 2021 will be a strong year for the bulk annuity market, with business volumes which may well surpass the £30Bn mark for the third year in a row.

The broker suggested that – without the hindrance of lockdowns and economic uncertainty – a stronger upturn could follow in 2022. However, it stressed that outcomes here are difficult to forecast given the dependency on, for example, insurer capacity and the availability of specific asset opportunities.

Nonetheless, it added that “there will be opportunities this year for schemes of all sizes but, of course, in a busy marketplace, the best outcomes will be achieved by those schemes which run a well-planned process and are ready to move quickly”.

The report continued: “At the start of 2020, we predicted the UK bulk annuity market volume would break the £30 billion mark, following the record-breaking £43 billion transacted in 2019.”

“However, it was a challenging year, with unparalleled difficulties due to the COVID-19 pandemic, such as investment volatility and operational restrictions. Despite this, the bulk annuity market demonstrated significant resilience, with indications suggesting the final volumes will still exceed £30 billion. This makes 2020 the second busiest year on record.”

As at the end of January, there was at least £28 billion of UK bulk annuities reported in 2020, with more expected to be disclosed as insurers prepare their year-end reporting, according to Aon.

In 2019, it added, “we had witnessed a number of multi-billion- pound transactions, most of which secured full schemes and dominated a large section of the market”.

In 2020, the broker noted, transactions requiring less sponsor funding or decision-making were inevitably more common, and added that it expects this trend will change post-lockdown, with a resurgence in scheme buyouts.

Commenting on the longevity market, Aon said that 2020 and the start of 2021 saw a very high number of deaths due to the COVID-19 pandemic. While the ultimate resolution of the pandemic remains uncertain, the overall consensus on mortality improvements over the long term has not changed significantly, it noted, adding that “longevity risk therefore remains a key concern for pension schemes and 2020 saw increased demand from UK pension schemes looking to hedge this risk”.