Market factors are set to drive a surge in UK pension risk settlement in 2023, Aon has said, with scheme preparation, including plans to deal with asset transition within an insurance transaction, expected to be "vital" in 2023.

Aon senior partner and head of UK risk settlement, Martin Bird, suggested that while 2022 was one of the busiest years seen in the risk settlement market, there is “every expectation that 2023 will see it accelerate”.

In particular, Bird predicted a focus on full scheme transactions driving significant volumes across the entire market, as well as a "continued resurgence of the £-billion-plus ‘mega deals’".

“These bigger deals will, of course, consume large portions of capital and assets at both insurers and reinsurers," he continued.

"But with increasing use of new sources of capacity, such as funded reinsurance and capital market money - and with potentially more flexibility within the Solvency II framework to come - we expect to see a greater volume of mega deals in 2023 and future years.”

Indeed, Bird also emphasised that while the trend of steadily increasing funding levels continued in 2022, with many schemes finding themselves becoming buyout or buy-in ready earlier than expected, the insurance market has the capacity to handle this demand.

"Insurer balance sheets proved to be resilient through the market turbulence and solvency positions reached record highs in the second half of 2022," he stated.

However, Bird argued that "there really is no substitute for preparation", clarifying that "whatever their financial capacity, there is a risk that insurers are overwhelmed by the volume of schemes coming to market and the demands on their resources".

Alongside the "usual need for good quality data and clarity over the benefits to be insured", Bird suggested that pension scheme trustees now need to consider the importance of having the right assets in place.

"Many investment portfolios have significant allocations to illiquid assets - which are generally challenging to sell at short notice," he explained.

"It’s therefore vital to have clear plans on how to deal with asset transition within an insurance transaction. It will be a key theme in 2023, both for schemes in their preparation and for the insurance market when considering solutions to help make better decisions.”

However, Aon partner, John Baines, suggested that the outlook for pensioner buy-ins is "rather more mixed".

He explained: "Market pricing is still very supportive of ‘exchanging gilts for annuities’, but one consequence of the newly emerging ‘liability-driven investment (LDI) 2.0’ environment is that actual availability of gilts to support these deals is now far more challenging.

“Pricing might look attractive but more cautious views on leverage reduce headroom for partial annuities and are likely to dampen volumes in this sector of the market.

“Commercial consolidators may also be a casualty of the market shifts in 2022.

"The schemes that were actively considering this option are now more likely to be closer to buyout or on course for one earlier than they had thought likely. We are aware of many schemes that switched their plans and are instead looking at buyout.”

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