Following on from our last blog where we discussed what should new entrants consider to ensure they are successful; we will now delve into the subject of opportunities that are provided to the industry with the rise of new entrants and explore the implications this has for trustees.

As mentioned previously, 2023 saw the re-entry of M&G into the bulk annuity market, the first change to the participants in the market since 2017. It is no surprise that M&G were attracted back into the market given the huge demand for transactions from pension schemes that have found themselves better funded than they expected to be, particularly after the increase in gilt yields seen following the LDI crisis. This week, Royal London announced as part of their 2023 financial results publication their intention to enter into this market too.

M&G and Royal London’s re-entry is positive news for trustees and sponsors of schemes as it opens further capacity in the market, at a time when capacity with other insurers is squeezed more than ever. We are aware of other insurers that expect to enter the market in 2024 too some of which are UK insurers who currently sell other products although it would be the first time they have been in the market for bulk annuities. This should increase capacity further, and we expect that other insurers will follow suit in future years.

These new entrants may find that getting buy-in from trustees to complete a deal may be tricky. With no track record to demonstrate that they can execute a transaction smoothly, as well as looking after the pension scheme members after the transaction completes, it may be a difficult decision for trustees to choose a new entrant over one of the more established providers in the market.

Bulk annuities have long been considered a viable option for trustees looking to offload pension liabilities to insurance companies. By transferring the risk associated with pension payments to an insurer, trustees can secure a more predictable and manageable future for their pension scheme members. Traditionally, this market has been dominated by a handful of established insurers. However, in recent times new entrants have begun to disrupt the status quo.

The entry and re-entry of new players into the bulk annuity market such as M&G and Royal London, brings with it a host of benefits and considerations. Firstly, increased competition fosters innovation and drives down costs. With more insurers vying for business, trustees can negotiate more favourable terms and secure better pricing for their schemes. Moreover, new entrants often bring fresh perspectives and tailored solutions to the table, catering to the specific needs of trustees and their members.

We expect that new entrants may offer a discount to their standard pricing to attract trustees to select them until they have enough of a track record to be credible, this could offer some excellent opportunities to trustees of schemes that are looking to transact during 2024. We will be watching closely to see what pricing opportunities there may be, as well as to see how these new entrants plan to administer benefits for scheme members, what segment of the market they plan to operate in, their data cleansing and asset sourcing capabilities and the people they have hired to operate in this complex market.

While the influx of new entrants presents exciting opportunities, it also necessitates careful evaluation and due diligence on the part of pension trustees. When considering engaging with a new provider, trustees must assess factors such as financial stability, record of accomplishment, and regulatory compliance. Partnering with a reputable insurer is paramount to ensuring the long-term security and success of the pension scheme.

While bulk annuities offer a means of de-risking pension schemes, they also introduce new risks, such as counterparty risk and regulatory uncertainty. By staying informed and engaged, trustees can navigate these challenges effectively and mitigate potential pitfalls.

The emergence of new entrants in the bulk annuity market presents pension trustees with an array of opportunities and considerations. By embracing innovation and competition, trustees can secure more favourable outcomes for their members while mitigating risks and safeguarding the financial future of their pension schemes. As stewards of member assets, it is incumbent upon trustees to stay informed, proactive, and discerning in their approach to engaging with new providers in the bulk annuity market.

Overall, we as an industry should be welcoming the increased market capacity and competitive tension that these new entrants could bring.

Andrea Mendham, Partner - K3 Advisory