The pensions risk transfer market could hit “boiling point” in 2023, Barnett Waddingham has said, after its analysis revealed that record demand has put the market on track to reach a total deal value of "well over" £40bn.

The group estimated that, further to the £21bn of bulk annuity deals which took place in H1, another £20-30bn is set to close by the end of the year, bringing the total 2023 deal value to well over £40bn.

Barnett Waddingham suggested that the heightened level of activity has been driven by a stark increase in demand from schemes to insure their liabilities, caused by a notable improvement in scheme financing over the last 18 months.

Indeed, Barnett Waddingham’s DB ‘End Gauge’ predicts that the average time for FTSE 350 schemes to reach end game, whether buyout or self-sufficiency, is now 5.3 years, down from 10.2 years in September 2021.

The analysis also suggested that around one third of FTSE 350 DB schemes are now fully funded on a buyout basis, representing around £160bn of liabilities, and many schemes are taking steps to lock in those positive improvements.

The analysis showed that it is not only the number of bulk annuity deals that is on the rise though, as transaction sizes have also increased materially, despite interest rate changes dampening this trend, reaching £220m on average in H1 2023 compared to £115m in H1 2018.

“Interestingly”, Barnett Waddingham found that this trend for increasing deal size still holds even if the mega £6.5bn RSA transaction is excluded from the 2023 data.

Barnett Waddingham head of bulk annuities and risk transfer partner, Rosie Fantom, commented: “We're expecting to see a similar sized market in 2024, which has the potential to be dominated by a small number of exceptionally large trades.

"The challenge for insurers will be to balance the appeal of writing new business, whilst effectively serving the business that have already written.”

In particular, Barnett Waddingham warned that, given the pace of the market and significant deal sizes, there is a risk that smaller transactions could get "lost in the noise", as the firm revealed that many insurers are segmenting the market and placing increasingly complex requirements on schemes ahead of committing to delivering a quotation.

These concerns are not limited to smaller schemes, however, and Barnett Waddingham argued that the current intensity of the market requires experienced professionals to help everything run smoothly.

Given this, it raised concerns that the capacity across the industry could prove inadequate to keep up with demand.

In particular, the group warned that pension administration teams are under intense pressure to run a high volume of data cleansing activities, while insurers’ implementation and administration teams are grappling with the influx of deals, creating significant resource pressure.

Barnett Waddingham also said that while the market is adapting to drive efficiency and respond to heightened demand, and other parties are building capabilities to join the market, it will take time for new entrants to launch new propositions, with continued pressure expected until then.

Despite this, Barnett Waddingham risk transfer partner, Chris Hawley, suggested that there are steps that schemes and sponsors can take to position themselves for a positive route to transaction.

“For example, being well prepared and having focussed objectives before approaching the market has never been more important,” he continued. “These steps will support the transaction process, but also make for a simpler and quicker route to buy-out with a higher degree of overall cost certainty.

“We’ve successfully placed every scheme we’ve taken to market in the last three years, including several small schemes under £2m. Regardless of scheme size, the most important factor in success is preparedness; quality of outcome must come first, and that means not rushing to market before you are ready.”

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