Schemes urged to be aware of changing dynamics amid capacity constraints

Smaller defined benefit (DB) pension schemes should be aware of changing dynamics in the UK pension risk settlement market, Aon has said, emphasising the need for preparation and flexibility.

The firm suggested that the positive start to 2023, and improved funding in the latter part of 2022, may see many schemes now finding that they are fully funded or approaching that point sooner than expected.

This, in turn, has fuelled expectation that more of them will come to the risk settlement market in the near future.

Indeed, Aon associate partner, Joe Hathaway, said that while 2023 was expected to be busy for the risk settlement market, improvements in funding have hastened the predicted trends".

"And while we particularly expected it to be an active year for smaller transactions, changes within the market are altering the way it is operating," he stated.

“We are aware that capacity restraints will limit insurers’ ability to quote on the increased number of requests they are receiving - particularly given the demands on their workforces - but we also know that insurers remain genuinely committed to providing solutions at the smaller end of the market.

"This is demonstrated by a number of insurers choosing to invest in further streamlining their broking processes - allowing them to quote on more smaller transactions than would otherwise have been the case.”

In particular, Aon stressed the need for smaller schemes to remain flexible on transaction timing, arguing that giving insurers as much flexibility as possible allows them more scope to resource transactions around the other quotations on which they are working.

Aon also pointed out that asset preparation is "increasingly important", noting that many investment strategies are anchored by illiquid assets, and being a forced seller means accepting a lower price, creating a shortfall.

Whilst Aon acknowledged that innovation is happening and schemes have found solutions to this challenge, it stressed that advanced thinking about exit strategies can help reduce cost and delays, urging schemes to take these steps "well in advance" of approaching the market.

In addition to this, Aon noted that insurers are looking to quote on an exclusive basis, as it increases the certainty of completing a transaction if they can put forward a compelling offer.

While this approach allows insurers to quote on a wider range of deals, Aon explained that it also places more emphasis on schemes having a credible comparator solvency figure against which to assess the insurer’s pricing, which will ensure the price achieved is competitive.

According to Aon, some insurers are also looking to increase standardisation of parts of the quotation process, such as using a standardised data template in order to make the process of providing a quotation more efficient.

Indeed, the company pointed out that there has been a trend in recent times to streamline the quotation process for smaller transactions by using pre-agreed contracts and single quotation rounds, highlighting this as a "developing area".

“The most important thing for schemes to bear in mind is that the market is still very much open," Hathaway added.

"When schemes look at how they can navigate new forms of volatility, it is often the case that the best decision for their members is to move to an insurance-based solution.

“But they also know that circumstances and pricing need to be right for them to move to that. If they can correctly prepare their scheme and their approach, they should have every opportunity to move ahead with a transaction.”

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