LONDON, 19 January 2021 – A year of continued volatility and opportunity awaits for pension risk management in 2021, according to Willis Towers Watson. Following a year of global turmoil, the pensions de-risking market showed great resilience to complete over £30bn* of buy-ins and buyouts and put in place £24bn of longevity swaps in 2020.
Willis Towers Watson anticipates similar levels of market activity in 2021 and four key themes are likely to shape the pensions de-risking landscape this year, according to the firm’s annual De-risking report 2021.
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Looking into 2021, the continuing pandemic and Brexit readjustments could lead to another year of volatility in investment markets. The lesson from last year was that volatility can create opportunity if schemes have prepared and are actively monitoring the market. Schemes should work in partnership with insurers to monitor market conditions, identify windows of opportunity and quickly determine if and when it is the right time to act.
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In 2020, the Pensions Regulator outlined how it will oversee superfunds and new risk management structures emerged. 2021 is likely to see an acceleration in this area and the first superfund deals complete, particularly due to an anticipated increase in distressed sponsors and pension schemes tackling funding level falls.
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Even before the pandemic, the slowing level of mortality improvements in recent years has been feeding through to the pricing offered by reinsurers for longevity swaps, resulting in the lowest pricing relative to pension scheme reserves on record. This, along with increased competition in the longevity reinsurance market, has been driving down prices for longevity swaps and bulk annuity transactions, which is expected to continue in 2021.
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The pension scheme universe is maturing and looking to manage risk, as funding improves and schemes become an increasing legacy concern for sponsors. According to our recent research, 40% of schemes are targeting a bulk annuity or longevity swap in the next three years.
Another year of high activity is expected, despite the funding challenges some schemes experienced last year, with around £30bn of bulk annuities to be traded and £25bn of liabilities covered by longevity swaps.
Ian Aley, Managing Director in Willis Towers Watson’s Transactions team, said:
“The pensions de-risking market has proved itself to be incredibly resilient and, while uncertainty will remain in 2021, we don’t see this denting the desire and ability for pensions schemes to complete risk management transactions.
“For many schemes, the market pricing of longevity will currently look very attractive relative to their funding reserves.”
Ian Aley,
Managing Director, Transactions
“It remains to be seen what impact COVID-19 will have on longer term expectations for mortality rates. For many schemes, the market pricing of longevity will currently look very attractive relative to their funding reserves. We therefore expect schemes will continue to look to lock into assumptions which are affordable against their current funding target to reduce future uncertainty as part of their wider hedging programmes.”
*£26bn of buy-ins and buyouts were publicly announced or led by Willis Towers Watson during 2020, with a further c£4bn expected to be announced in the coming weeks.
Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 45,000 employees serving in more than 140 countries and markets. We design and deliver solutions that manage risk, optimise benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas — the dynamic formula that drives business performance. Together, we unlock potential.
