I predict that 2021 transaction volumes won’t set a record, with fewer multi-billion size transactions taking place than recent years. However, we might well see the largest number of trades on record completed in a year.

This activity is driven by the large quantity of small and medium-sized schemes approaching the market. K3 is a growing business in this area, and we are currently advising over 20 schemes at or planning to approach the bulk annuity market.

Another point that might not be obvious is that most of the market activity is for full scheme buy-outs. Although some of the largest deals have been partial or pensioner-only buy-ins, by number of trades, buy-outs are by far and away more predominant. Only five of the schemes K3 is currently helping are considering partial buy-ins, with the rest being full buy-outs.

·      Asset out-performance: UK and global equity markets have performed well. For example, the FTSE 100 Total Return Index is up over 30% since 31

October 2020. (Source: Financial Times)

·      Risk-free yields: Although falling in recent weeks, the yield on UK 15-year fixed interest gilts has been between 0.4% to 0.7% higher over recent months than at the start of 2021. (Source: Financial Times) Many smaller or less well-funded schemes that haven’t hedged interest rate risk have gained from this.

·      Insurer pricing: Pricing for pension liabilities has remained relatively stable but we have seen improvements in the pricing offered for deferred liabilities, particularly for smaller schemes where some insurers now have improved facilities to reinsure longevity risk for deferred liabilities.

K3’s analysis shows that smaller schemes who have been primarily invested in growth assets have seen a c. 20% improvement in buyout funding levels over the last year.

All good news, right? Almost! The high activity has taken insurers by surprise and their human capital is in limited supply, so insurers are being more selective about what they will quote on. Many insurers look at transaction size to decide on the best opportunities (although that ultimately leads to lower margins for them, as they all chase the same cases) and we have seen one insurer pull away from smaller transactions.

Firstly, schemes should consider whether they really understand how close they might be to affording buy-out. In my experience, schemes generally believe they are further away than they are. This can be due to scheme actuary solvency estimates that might be out-of-date or don’t take account of the dynamic nature of insurer pricing and therefore don’t reflect current market pricing.

I would encourage trustees and sponsors to consider getting a market expert involved. They will capture current pricing and, crucially, bring an independent view to the table. They can also help schemes assess what work is needed to become insurance-ready, which is critical in such a busy market.

A simple checklist would include:

·      Data: Review how complete the data is. Calculate contingent spouses’ benefits and collect information on each member’s marital status and updated addresses.

·      Benefits: Produce an insurer-friendly benefit specification, drafted by the scheme’s administrator and reviewed by the scheme’s legal adviser, who should also advise on how to deal with Trustee discretions.

·      Sponsor and Trustee alignment: Confirm whether the sponsor has a budget to fund a buy-out and address with company advisers and auditor the likely accounting impact, to avoid surprises close to a transaction.

·      Governance: This must be fit for purpose, as a buy-out is probably the single largest transaction a scheme will undertake, and certainly its last. A professional, independent trustees brings safety in carrying out such a big project and can encourage more insurers to quote.

Once ready, an adviser with buy-out expertise should lead the transaction. This improves the chances of getting insurers to quote and of getting the transaction over the line, plus makes sure it is completed safely.

Adam Davis, Managing Director, K3