UK pension longevity risk transfers hit record £55.8bn

Total buy-in and buyout volumes stood at £31.7bn, with the record-breaking year instead being driven by longevity swaps reaching £24.1bn

Longevity risk transfers by UK pension schemes hit a record £55.8bn in 2020, up on the £51.6bn completed the year before, analysis from LCP and Mercer has shown.

Total buy-in and buyout volumes stood at £31.7bn, the second largest ever recorded in a single year but behind the £43.8bn volumes racked up in 2019, with the record-breaking year instead being driven by longevity swaps reaching £24.1bn.

Legal & General (L&G) had a 24 per cent market share, followed by Rothesay with 22 per cent, Aviva with 19 per cent and Pension Insurance Corporation (PIC) on 19 per cent.

The year’s largest single buy-in or buyout transaction was an unnamed £3.3bn buy-in completed by Rothesay in December, with PIC’s £2bn Old British Steel Pension Scheme buyout coming in second.

Analysts at LCP commented that mid-size transactions soared during the year, with a 67 per cent rise in transactions between £100m and £1bn in size.

Moreover, Mercer pointed out that more than half of 2020's deals (77 deals) were below £100m in volume, of which 21 were below £10m.

Meanwhile, the year saw six longevity swaps announced by UK schemes totalling £24.1bn, compared to two totalling £7.8bn in the prior year, with the £10bn swap between Lloyds Banking Group Pensions Trustees Limited and Pacific Life Re coming in as the second largest transaction of this type ever completed.

There were also two conversions of longevity swaps to buy-ins over the year, by the MNOPF and the LV= scheme, taking the total number of conversions to eight.

LCP partner, Imogen Cothay, commented: At the start of last year before the Covid-19 pandemic took hold we predicted that buy-in and buy-out volumes would top £25bn in 2020. It’s a mark of the resilience of the pensions de-risking market that volumes surpassed our expectations topping out over £30bn.

The pandemic led to some exceptional pricing in spring 2020, fuelled by falls in the price of assets used by insurers to back their pricing. We helped schemes of all sizes assess their options during the spring, with many deciding to accelerate their transaction timetable or to complete opportunistic transactions, Cothay said.

LCP partner, Charlie Finch, added that there was like to be “sustained volumes of longevity risk transfer over the next year” as a surge in gilt yields had boosted funding levels and given extra capacity for de-risking, while strong competition between insurers had lead to “some attractive opportunities”.

Also looking ahead, Mercer head of risk transfer, Andrew Ward, said: Over 2021, we expect to see around £60bn of risk transfer deals across the market, with alternative strategies such as capital-backed journey plans and the first DB superfund deals starting to play a part in schemes’ risk transfer journey planning.

Significant interest rate rises since the start of 2021 will have resulted in improved funding levels for many schemes. As with any source of market volatility, there will be opportunity in 2021 for schemes that are well positioned, well prepared and actively scanning for opportunities, he said.