During March and April 2020, financial markets were especially volatile and corporate bond spreads spiked sharply. This led to a short period where very attractive pricing from some insurers was available, particularly for pensioner liabilities, benefitting some schemes that were well-prepared to go to market at that time.

While market conditions have been more benign over the past six months, activity remained strong and we have seen a rise in the number of smaller pension schemes that have seen their funding levels improve to a point to where a full buy-out is within their grasp. Total transaction volumes in 2020 eventually surpassed £30bn, a figure beating every other year except 2019.

Significantly, there were fewer £1bn+ transactions completed in 2020 than 2019, contributing to the fall in total volumes but also meaning insurers had an increased capacity and the appetite to transact with smaller schemes.

Although insurers have indicated that Q1 2021 has been relatively quiet in comparison, we continue to see a strong pipeline of schemes and employers in position to approach the market. Another £30bn+ of transactions is a reasonable expectation for 2021.

Like many businesses, insurers, scheme trustees and their advisers have demonstrated that remote working has not dramatically impacted on the delivery of bulk annuity projects. Indeed, the completion meeting arranged at relatively short notice as a video call might well be here to stay!

Seven of the eight bulk annuity insurers are now able to quote on transactions that include deferred member liabilities to some degree, with the eighth set to do so later in 2021. This is a positive development for small schemes, where a full buy-out could be the only effective route to market.

The Pension Protection Fund (PPF) does not appear to have seen an unusually large influx of schemes entering assessment since last March, although there have been several high-profile company insolvencies. Government financial support to employers during the pandemic means some insolvencies could be delayed rather than having been prevented entirely.

If so, there could eventually be a significant increase in schemes entering PPF assessment, some of which will be funded well enough to secure benefits above PPF compensation levels. Given the “PPF+” route has been a relatively lightly trodden path to date, it will be interesting to see how the PPF develops its processes if there is a surge in such cases. We expect the emerging superfund market to also be a potential home for some of these schemes.

Superfunds In 2020, the Pensions Regulator (TPR) issued regulatory guidance for commercial consolidators or “superfunds”, followed by guidance to trustees and employers considering a superfund transaction, putting us several steps closer to the first transactions in this market.

However, we are still awaiting the conclusion of TPR’s assessment of the two players in the market, Clara Pensions and The Pension SuperFund. Although this process has taken longer than expected, all signs are that the first transactions will take place later in 2021 and that there should be a strong pipeline of candidate schemes, especially if the post-pandemic economy does reveal a significant number of employers with defined benefit schemes in distress or with covenant concerns and where buy-out is unaffordable.

Also sitting in the non-full insurance space with superfunds (and longevity swaps) are different capital-backed de-risking solutions. These have been few so far – those in the public domain include a transaction led by Aspinall Capital Partners announced in May 2020 and a second Assured Payment Policy (APP) deal by Legal & General announced in January 2021, the latter being an investment product similar to a buy-in without coverage of longevity and demographic risks.

While bulk annuity transactions will continue to be predominant, augmented by a growing superfund market, we can expect insurers and other capital providers to develop alternative products that could provide an optimal solution for some schemes and employers.

To what extent life, and businesses, can revert to a new normal and what exactly that looks like, only time will tell. In our view, the experiences of the past 12 months have wiped away any complacency that businesses might have had. Companies need to be robust to deal with such scenarios and a legacy defined benefit pension scheme on the balance sheet is a risk many now urgently want to address. We think more companies and trustees will accelerate their timescales for dealing with their schemes once and for all.