Seizing Opportunity in a Booming Pension Risk Transfer Market

Seizing Opportunity in a Booming Pension Risk Transfer Market
January 4, 2024 19 mins

Seizing Opportunity in a Booming Pension Risk Transfer Market

Seizing Opportunity in a Booming Pension Risk Transfer Market

Businesses considering pension risk transfer to mitigate volatility should prepare now to be well-positioned for market opportunities.

Key Takeaways
  1. Evolving macroeconomic and social conditions have caused companies to examine the benefits of offloading pension risk.
  2. Related insurance markets are thriving as senior leaders look to transfer risk, capture efficiencies and create a more agile business through pension risk transfer.
  3. Trustees and plan sponsors must have a well-developed strategy to maximize engagement from insurers.

Healthy pension plans, combined with a growing and competitive pension risk transfer (PRT) market, create an opportunity for plan sponsors to rethink their methods. The pension landscape looks vastly different today than it did 20 years ago. In the era of the 60-year career and a global transition toward sustainable pension models, employers are likewise rethinking their approach to pension plans — and they should strike while the iron is hot.

Better Informed 

Trends Driving the Pension Risk Transfer Market 

Notable social and macroeconomic developments have impacted pensions, helping to drive a surge in demand for pension risk transfer:

Longevity risk remains top of mind for trustees and plan sponsors. If plan members live longer than forecasted, pensions will also be paid longer than expected and cost more money. Both trustees and corporate sponsors rank longevity in the top three risks faced by defined benefit (DB) pension plans, according to Aon’s Global Pension Risk Survey. Further, volatile mortality rates mean the impacts of this risk are hard to predict. Sponsors are therefore reconsidering the long-term goals for their pension plans and looking to PRTs as a solution.

Rising interest rates have served as a catalyst for increased PRT activity. The sharp rise in interest rates in certain regions has reduced the size of plan liabilities and left pensions better funded.1 This then results in lower dollar cost for individual PRT deals. 

Pensions have reached well-funded levels. In October 2023, Aon’s Pension Risk Tracker reached its highest funded status level since it was introduced in 2011, the aggregate pension funded status of S&P 500 companies surging to 104.3 percent. Similarly in the UK, the average funding positions of DB schemes have steadily increased. Combined with the impact of rising interest rates, many pension schemes reached a fully funded position in 2022, leaving their sponsors prepared to consider a PRT transaction.

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Pension plan funding is at historic highs. With higher interest rates than we've seen in the last decade, plan sponsors now have the opportunity to do more with their pension plans, including solutions like pension risk transfer.

Megan Nichols
Partner and Head of Pension Settlement Solutions, United States

Regional PRT Markets Worth Watching 

Two regions — the United States and United Kingdom — have seen significant growth in their respective PRT markets. They are worthwhile geographies for investors to therefore keep their eye on as the pension risk landscape evolves.

  • United States

    The PRT market in the United States (U.S.) is growing at about 20 percent annually and is on track to have another banner year. In 2022, there were 568 PRT transactions totaling $51.8 billion in premiums, representing a record high.2 The market is on track to reach $45 billion in premiums placed in 2023, with 289 transactions occurring in the first half of the year, totaling $22.4 billion in premiums.3

    Retiree lift-outs, also known as partial buyouts, are the key PRT transactions driving growth in the market. They also account for most mega-deals in 2022 that contributed to the large premium volumes seen in the U.S. marketplace.

    Competition among insurers in this market is increasing. There are now 21 insurers active in the pension risk transfer market, up from just eight insurance companies a decade ago. “Multiple new insurers have entered the market over the last few years,” says Megan Nichols, partner and head of Pension Settlement Solutions at Aon. “This drives pricing competitiveness and gives rise to more sophisticated insurance solutions.”

    For 2024, areas to watch in this market include split transactions — where two insurers bid on and execute a PRT transaction, splitting up the participant benefits between them — and buy-ins, both of which are becoming more popular.

  • United Kingdom

    The PRT market in the United Kingdom (UK) has also had a banner year. In 2022, the bulk annuity market saw total volumes of $33.6 billion in premiums. By comparison, the market in H1 2023 topped $25 billion in premiums. Those numbers are even more impactful when considering real interest rates. “As a result, PRT performance from 2022 needs to be scaled down from 25 to 50 percent to see an accurate comparison between the two years,” explains Martin Bird, senior partner and head of UK Risk Settlement at Aon. For 2023, forecasts point to the market reaching approximately $60 billion in premiums — nearly doubling the total volume.

    “Pricing and capacity in the insurance market are absolutely buoyant at the moment,” adds Bird. “We have a very vibrant market, and plan trustees and sponsors want to capture the opportunity while it’s there.”

    While opportunities in the market are vast, insurers in the UK are overwhelmed with plan sponsors looking to execute full-plan transactions, rather than only insuring a portion of their plans. Combined with a growing number of billion-pound trades, these behaviors are boosting volume in the market. 

    The UK marketplace is expected to perform well into 2024, though insurers are not sitting on their laurels. Players in this market are working hard to find solutions to complex challenges facing employers, such as the problem of illiquid assets. Many pension plans have made use of illiquid assets as part of long-term investment strategies. The challenge is that these assets cannot easily transition over to an insurer, but to sell them quickly risks incurring large exit penalties. Bird predicts that a key theme over the coming years will be how to unwind illiquid assets as part of a PRT transaction without destroying value. 

Better Decisions 

Four Ways to Take Advantage of a Competitive Pension Risk Transfer Market 

As the PRT market continues to grow, businesses need to consider how to best position themselves to maximize insurer engagement. Having multiple insurers bid on a transaction can improve pricing competitiveness and allow a sponsor to compare multiple options.

1. Follow the Money
Financials are the first item that plan sponsors should examine when considering a PRT transaction. Specifically, companies need to look at the funding status of their pension plans and decide if getting to a fully funded status is palatable. This is typically the first barrier or gateway to moving forward. There are also accounting implications, from settlement charges to annuity payments, that a business needs to keep in mind.

2. Get Your House in Order
To attract the attention of insurers, sponsors need robust and clean data about their pension plan and plan-invested assets to demonstrate how they are going to fund the annuity premium. They also need to conduct thorough legal due diligence and decide on important terms. The structure of annuities can be complex, so being clear about the preferred deal structure and ensuring strong alignment between the trustees and plan sponsor is key before going to market. 

Most importantly, take your time. Some sponsors are worried about missing a window of opportunity and may rush to enter the PRT arena. But doing so can cause missteps and prevent a sponsor from getting transaction-ready, which insurers will notice.

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To get insurers to bid, trustees and plan sponsors must do their homework to put themselves in the shop window and look like a project that has a high degree of potential.

Martin Bird
Senior Partner and Head of Risk Settlement, United Kingdom

3. Track the Market
Having a finger on the pulse of the market is vital to understanding whether a balance sheet can handle a PRT transaction. An annuity pricing tracker provides daily estimates of what insurers will charge for PRT annuity payments. 

4. Choose Skilled Advisors 
Working with a respected and experienced advisor who understands how to successfully execute a deal will help competitively position a plan sponsor to insurers. Moreover, an advisor that is active in the PRT market, with a wealth of data to back up their know-how can provide crucial insight into pricing and terms. 

In fact, not having a well-versed advisor in a plan sponsor’s corner can hinder a PRT deal. “Insurers don’t want to chase after a project where there is an inexperienced advisory team because it can create complex deals and execution risks,” says Bird.

To reap the full benefits of PRTs — from long-term de-risking strategies to securing the interest of insurers active in this arena — companies should prepare themselves effectively before entering the marketplace.   

Learn more about how your organization can take advantage of the fast-growing PRT marketplace.  

Aon’s Thought Leaders
  • Martin Bird
    Senior Partner and Head of Risk Settlement, United Kingdom
  • Ari Jacobs
    Senior Partner and Global Retirement Solutions Leader, North America
  • Megan Nichols
    Partner and Head of Pension Settlement Solutions, United States

1Aon’s Climate Change Challenges the Food, Agriculture and Beverage Industry
2Aon’s Operational Resilience in the Food, Agribusiness and Beverage sector
3 Food Security Update | World Bank Response to Rising Food Insecurity, The World Bank, 2023
4 This is the state of food security in 2023, World Economic Forum, 2023
5 Global Burden of Crop Loss, CABI
6Aon’s Industry Overview, Food, Agribusiness and Beverage
7 2022 Ponemon Cost of Insider Threats Global Report, Proofpoint, 2022
8 Global rice supplies tighten after India's July export ban, Reuters, 2023
9Pentland Analytics’ and Aon’s Respecting the Grey Swan
10 Farm and food investors face $150 billion loss on climate change, report says, Reuters, 2022
11 Ibid.
12 MICT’s Tingo Foods Partners with Evtec Energy to Build $150 Million Solar Plant in Nigeria, Solar Quarter, 2023
13Aon’s Captive Insurance
14Aon’s Digital Business Insights (DBI) Platform
15Aon’s HR Plays a Pivotal Role as People Risks Become Business Risks
16Aon’s 2022-2023 Global Wellbeing Survey

The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice.

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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