In 2016, construction giant Carillion reported sales of £5.2bn; a little over a year later it went bust. The company – which counts the home of Liverpool Football Club and the regeneration of Battersea Power Station among its work – collapsed under the strain of a £2bn debt.
Yet this was not the full picture. Carillion was on the hook for a further £900m. This was not a loan or money owed to suppliers, but the collective deficit of the 13 defined benefit (DB) pension schemes it sponsored.
The company was unlikely to have to pay the entire shortfall in one day, but it is responsible for that deficit and so it extended the already huge debt pile by almost 50%, hitting its value.
This is an example of why the UK’s final salary scheme de-risking market has rapidly grown to be worth around £50bn a year.
The market allows DB scheme sponsors, who are typically employers, to relieve themselves of their duty to pay their former employees’ pensions through a one-off premium to an insurer for a bulk purchase annuity.
In short: the sponsor pays an insurer to take on the burden of paying the retirement benefits of the members who are covered by the policy. Bulk purchase annuities take the form of a buyout, where an insurer assumes full responsibility for members’ pensions.
The other option is a buy-in, where the insurer agrees to provide the cash flows needed to cover the benefits, but the legal responsibility remains with the sponsor. The deal here is the financial risk of members, or their descendants, living longer than expected is passed to the insurer.
But the question is, after such a strong run, what will happen in this market in the year ahead?
One a day
In 2024, there were about 250 transactions, which is “pretty much one for every working day” – meaning the market was worth just shy of £50bn, says Steve Robinson, a partner at Isio who leads the de-risking team.
Looking at the year ahead, Robinson will be interested to see how the market maintains the volume and the size of transactions going forward. “Last year was expected to be a record year, but it fell slightly short of 2023’s £50bn total,” he says.
“The challenge is, how does the market overall continue the throughput. There is enough demand there to grow the market, in terms of volume and number of deals,” Robinson says.
Kunal Sood, managing director of defined benefit solutions at Standard Life UK, describes the de-risking market as “buoyant” as the momentum driving transactions totalling around £50bn in each of the past few years is showing no sign of slowing down.
“The pipeline is building up,” he says. “Conversations are ongoing with trustees about their de-risking plans, and the expectation is that it could be another £40bn to £50bn year.”
Sood is not the only insurer expecting a big year. “We are in January and I can already see a pipeline that is as big as last year’s,” says Tom Seecharan, co-head of origination at Pension Insurance Corporation (PIC).
“That is not normally the case, as the pipeline develops as the year goes on,” he adds. “This is an indicator of it being quite a big year.”
For Willis Towers Watson’s Shelly Beard, the market is only moving in one direction. “Last year was busy and the year before that was busy. It is going to be more of the same in 2025,” says the managing director within the firm’s bulk annuity and longevity hedging team.
Seecharan estimates that there are around 4,000 defined benefit schemes that do not have a bulk annuity and that 300 or so deals are expected this year, beating the 250 that were recorded in 2024.
Part of the reason why insurers are seeing growing pipelines is due to the rise in gilt yields. Schemes are now better funded and can afford to buy insurance cover years earlier than expected.
In response, insurers have been recruiting and improving their systems and processes to meet rising demand, says Chris Rice, head of trustee services at Broadstone, a consultancy. “So I expect to see more deals this year.”
A trend Robinson has seen in his almost two decades working in this market is that there are not only more transactions, but there are more larger deals, too. “
Although the market potentially being worth £50bn a year is the sexy thing for people to talk about, the market is typically driven by one or two large transactions,” Robinson says.
Indeed, of the 250 deals agreed in 2024, £11bn was for NatWest’s pension scheme.
It is a trend that looks set to continue. “There are some large schemes in the market getting quotations from insurers,” Robinson says. Standard Life ended last year with a £1.5bn deal with Compass, the food services specialist, and Sood expects more of the same.
“There are more and more schemes of that size which have been on their de-risking journey for some time and will pursue buyout this year. That pipeline is pretty strong. “If some extremely large schemes decide to speed up their de-risking activity, it could swing to north of £50bn easily. That is my expectation for the year,” Sood adds.
New players
In a sign that the UK’s bulk purchase annuity market is not a passing fad, it welcomed four new insurers last year. Utmost Life & Pensions, Royal London, M&G and Canadian investment manager Brookfield have all entered the market in the past 12 months.
“They have spotted that it is a growth market which is going to be around for a number of years,” Beard says.
Royal London and Utmost are focusing on the smaller end of the market, which is believed to be deals worth less than £100m. “They have recognised that that end of the market was slightly less well served than the larger end. They have spotted that there is an opportunity,” she adds.
For Rice, the smaller end of the market is attractive as they are more likely to be successful, as not all insurers will quote for those deals.
“If you are looking at £150m deal, you might get six or more insurers involved. For a £15m deal, there might be one or two or potentially three.
“So they know that their hit rate of transacting is higher on those,” Rice says. “If they are well structured legally and from an admin perspective, they can do a volume of those deals.”
One insurer welcomes the new entrants as good news for schemes. “That level of competition generates more value but also delivers cleverer ideas,” Sood says. “We are seeing a bit of both. This is a sign of how buoyant the market is.”
For Robinson, the attraction of the bulk annuity market is strong. “From an insurer’s point of view, there is no other product like bulk annuities,” he says.
“If you want to gain market share in individual annuities or in group personal pensions, you normally have to reduce your price. There is a marginal cost of getting the new business. With the demand for bulk annuities, this is an area where insurers can write more business without cutting margins on existing business lines. There is a demand for new business in bulk annuities unlike any other insurance product,” Robinson says. “Hence why insurers want to write more business, are increasing their targets and why new insurers are coming into the market.”
He adds that another insurer is expected to arrive this year, which would bring the number of players to 11.
Robinson also claims that a further four have been looking at the market for a few years. The high barriers to entry have deterred them, he says.
The first issue is a limited number of people with the expertise to work on such arrangements. Then there is the cost of securing regulatory approval and building the infrastructure needed to run a bulk annuity business. “It is tens of millions of pounds of investment just to enter the market,” Robinson says.
A competitive market
Seecharan describes pricing at the moment as “competitive”. “We are definitely seeing the impact of new entrants into the market,” he adds. “Although most of them are focused, at least initially, at the small end, they could drive good price competition across all deal sizes as they pick up a bigger market share as other insurers might look to focus on slightly larger cases. That domino effect goes all the way up.”
For Sood, pricing is competitive because it is a competitive market. “We have seen spreads tighten over the past six months, which will have a particularly detrimental impact on pricing, especially since rates have risen, which has counteracted any small reduction in pricing,” Sood says.
Higher rates are another reason why a lot of schemes might be in a better funding position than they were a couple of months ago. “So on balance, affordability is still going to be strong,” Sood says.
Not just about the money
Pricing and achieving good value are important factors for trustees when choosing an insurer. Yet another trend is emerging where issues aside from price are having more influence on the decision to select an insurer.
Beard says that the service the membership can expect from an insurer post-deal is a growing consideration. “[Trustees] are thinking about how good is this insurer going to be for my members,” she says. “What is it going to feel like from my members’ perspective to interact with this insurer?”
Sood agrees that the quality of the communication with the members is important, as is the ease at which they can access their data. This should include getting a transfer value as easy as it would be to check the balance on their savings account.
De-risking the de-risked
What might prove so attractive to insurers is that they are taking over a de-risked portfolio. The assets owned by a scheme can be used to pay for the premium, but it seems that the assets insurers will accept are limited.
PIC allows schemes to pay them in cash, gilts, investment-grade corporate debt and swaps. “Some schemes ask if we could take on certain illiquids, and sometimes we do,” Seecharan says.
“In the main, they are not structured in a way that is cost-effective for PIC to take and hold, but there are exceptions,” he adds. “Property, if it is in the right form, but schemes are generally looking to offload those types of assets.”
This all depends on the size of the scheme. For some larger transactions, an insurer might take some property. “The insurer wants to win the deal and so will be flexible about what they will take,” Beard says.
It is a different story for smaller deals. “They just want cash,” she adds. “As you get a little bigger, they might take gilts as well. As you get bigger still, they maybe will take some credit, but cash and gilts are the core assets everyone is happy with.”
The assets Standard Life wants to see in a portfolio are cash and gilts as well as corporate bonds at the more liquid end of the scale. “There is room for some less liquid assets, but they have to be stable and highly rated,” Sood says.
“Our advice to schemes pursuing a buyout is to think about positioning their portfolio in a way that would allow them to have the most seamless transfer to an insurer,” he adds. “That means aligning to the Solvency II view of the world, but largely between debt assets, which are well rated and have predictable cash flows.”
A small price to pay
So the advisers and insurers I spoke to have little concern over demand given higher funding levels and the capacity to serve the market.
It is interesting to note that if the trustees of Carillion’s 13 DB schemes wanted to shift the responsibility of paying the pensions of its 27,000 current and former employees to an insurer, it is estimated to have cost them £2.6bn.
This is quite steep in terms of a cash-strapped business having to fund this, but would it have been a small price to pay to de-risk its already risky balance sheet?
The market, it seems, was there.
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