We’ve led on many bulk annuity transactions, and they all tend to have different reasons for proceeding. As we start the new year it’s worth reflecting on the drivers that led many to carry out bulk annuity transactions in 2022, as many of these reasons continue to apply this year too. It would be a real shame if any defined benefit pension schemes miss an opportunity to secure their members’ benefits at a cost that works for everyone.

1.                  Long dated gilt yields rose sharply, which led to rapid improvement in funding levels particularly for less well interest rate hedged schemes. For those trustees that directly experienced poor funding levels in the past, this has been a great and unexpected chance to lock in the improved funding position and ultimately remove pensions risk from the employer’s balance sheet.  Opportunities to lock in gains, and secure a bulk annuity, can arrive and disappear quickly so trustees and employers should put mechanisms in place to ensure that they always keep an eye out.

2.                  Credit spreads, the extra yield on corporate bonds compared to government bonds, were elevated allowing insurers to access and pass on these higher corporate bond yields, thereby reducing the insurance premium. This benefit particularly applied to schemes which held predominantly gilts to hedge their interest rate and inflation risk as the bulk annuity premium fell more than the asset value.

3.                  There continued to be strong business appetite from insurers for transactions, which we expect to continue into 2023 and beyond. This appetite is driving competition and has led to better pricing for trustees.

4.                  The threat of continued high inflation persuaded some cash rich companies to make extra scheme contributions before the cash lost value. When combined with the threat of imminent recession it’s clear that some employers would benefit from removing pension scheme risks from their corporate balance sheet rather than investing in the business.

5.                  GBP Sterling has been historically weak and is expected to remain so for some time to come. This makes extra pension scheme contributions far more affordable for overseas employers or companies with overseas parent companies; particular those in the US due to the relative strength of the US dollar.

6.                  In advance of corporate activity, some companies were tidying up their balance sheets to get the best price for the overall business. Similarly, some long-standing trustees looked to “resolve” the defined benefit scheme before they retired, handing over a simpler pensions situation (or no pension scheme!) to their successor.

7.                  Several senior management teams refocused the employer on their core business and sought to remove the balance sheet risk and management distraction of the defined benefit scheme.

8.                  Recent member experience, possibly accelerated by COVID, has seen higher than expected cash equivalent transfer value and number of retirements, which has sped up the maturing of defined benefit scheme. As schemes mature they become cheaper to insure.

9.                  Fiduciary management oversight analysis uncovered insurance opportunities where bulk annuities do not form part of the fiduciary manager’s mandate or expertise. This demonstrated the importance of trustees regularly considering whole of market options and opportunities.

10.              With many new onerous and costly pensions regulations on the horizon some companies are buying out their pension scheme because the estimated long term running costs are greater in 'value’ than the immediate cost of buying an annuity.

And of course, any definitive list of ten items wouldn’t be complete without a bonus item!

11.              Whilst leveraged LDI funds are much more robust now than they were in the summer, if we see gilt yields rise very fast again, a bulk annuity is not leveraged and so avoids the stresses and strains many defined benefit schemes had to deal with in the autumn. Trustees should consider when the right time is to move from LDI to bulk annuities.

Overall, we expect 2023 to break the record for bulk annuity transactions in what will be a fiercely competitive market. Those trustees and employers that know what they want and why, and are well prepared, will get the best deals for all concerned.