An analysis of the most pressing concerns based on insights from 1,000 UK business leaders.
Authors: Mark van den Berghen Samuel King
For professional clients only
This is a financial promotion approved by Gallagher (Administration & Investment) Limited on 4 December 2024.
The transaction timeline for many UK DB pension schemes targeting a bulk purchase annuity has accelerated rapidly over the last few years, mainly as a result of the gilts crisis in 2022. What was once an aspiration for many schemes to transact with an insurer has now become a reality. However, this leaves thousands of other schemes wondering about their future in the market. Will they also meet their endgame, or will bottlenecks slow the pace?
We have been testing the much-discussed ‘capacity crunch’ to get to the bottom of what is actually happening in the market. With insurance company teams spanning origination, pricing, legal, administration, transition and payroll, we looked closely at where the bottlenecks are and how this is impacting the differing profiles of schemes wanting to transact. Furthermore, how will the market develop over time for those waiting to transact as more schemes complete full buy-in of their liabilities?
How has market activity changed, and how are insurers reacting? 1
The number of transactions has increased by over 50%, from roughly 150 in 2021 to 230+ in 2023, with our expectation that 2024 will be a record year. Most insurers are now receiving roughly one pricing request a day—representing a 50% increase between 2022 and 2023. This increase is most profound for schemes under £100m, where the number of requests has doubled, adding particular pressure in this part of the market. As a result, the busier insurers tell us that they now quote on 30% fewer tenders compared with previous years.
While 2023 saw double the number of £1bn plus transactions as 2021 and 2022, the number of transactions under £10m rose by around a half and transactions in between those limits stayed broadly consistent. This is encouraging and supports what we've heard from insurers: mega deals don't prevent insurers from undertaking deals elsewhere across the market.
However, although the impact on transaction capacity from large deals has been minimal, we have nonetheless seen a change in the willingness of insurers to engage in more speculative quotation processes. As a result, smaller schemes are now more likely to conduct streamlined processes, perhaps approaching just one insurer, while larger schemes are still able to partake in the more traditional multi-round, multi-insurer quote processes. This has created a "squeezed middle" for schemes between the two extremes.
Existing insurers have tried to keep up with increased demand
Our research indicates that most insurers have increased their team sizes by around 20%, with a particular focus on pricing and transition teams. But, in truth, it has been impossible to recruit at the pace needed.
Highlights we've heard from insurers as part of our research include:
- The development of four streamlined solutions that aim to increase efficiencies without compromising the rigorous modelling required to produce quotes, typically through requiring data in a set format and limiting the benefits insured. These expedited processes are often supported by ring-fenced teams to ensure capacity when larger, more complex deals emerge.
- For larger deals, some insurers call on additional resources from administration, pricing, and legal departments to help manage capacity and meet deadlines, minimising the impact on other schemes.
- Some insurers outsource specific services such as passing cashflow production to actuarial consultancies — helping insurers manage resources without needing to find additional headcount and effectively passing the capacity issue onto third parties.
New insurers in the market include M&G, leveraging Prudential's backbook to deliver competitive deferred pricing; Royal London, which now insures external schemes alongside their own, and most recently Utmost. All have seen the potential in the market and gone through the authorisation process. Time will tell how much competition they bring — and they, along with future entrants, will take a while to establish themselves and build up the capacity to really change the tide.
Our overall conclusion is that insurers are leveraging resources across their business to meet demand for buy-ins that fit their criteria. However, schemes that are operationally or structurally complex are being turned away more frequently, facing limited competition and fewer insurer options. The evidence shows that while a true "capacity crunch" at buy-in stage may not yet be present, the high volume of potential transactions means that only those schemes with strong bargaining power can be sure of multi-insurer competition during the tender processes.
The "hidden" bottleneck: Delays in post-buy-in transition
While the attractive 'front end' of buy-ins thrives, for those wishing to progress to buy-out, a resource issue for some insurers appears within their transition teams, who complete the true-up and movement from buy-in to buy-out. This is also true of consultancy and pensions administration businesses. Schemes that initially planned for their transition to buy-out to take 12-16 months are increasingly experiencing longer timescales, due to the record levels of buy-in activity. Realistic fee structures and timelines are essential in light of these delays.
The majority of transitional work involves aligning payroll systems, finalising data queries, and resolving admin processes. This is time-intensive work that isn't easily streamlined in the same way that pricing models can be fine-tuned. Recruitment efforts may help, but skilled pensions administrators remain in high demand. Furthermore, many roles require office-based presence, making recruitment across widely spread offices an additional challenge.
Without increased focus on the transition stage, the resource crunch post-buy-in is only likely to grow. Strong collaboration between all involved parties, along with pre-buy-in work, can help mitigate some of these delays.
What does this mean for the future?
We believe that the front-end market for buy-ins will continue to be strong, with insurers available for attractive schemes that want to transact. However, in light of pressure on insurers' transition and administration functions, smaller or complex schemes could find it harder to locate insurers able to transact immediately, risking further delays to their endgame.
With the growing demand for buy-in transactions, particularly from smaller schemes, the queue for post-buy-in transition work will grow – and this is where we see a capacity crunch sitting. Insurers may struggle to recruit at the pace needed, unless the attractiveness of joining packages improves – which, of course, could impact buy-in pricing.
Although insurers and advisers are exploring ways to streamline the transition stage, these changes are still in the early days. Timescales for GMP equalisation processes, for example, add further pressure to transition timelines. Some new transactions are already being quoted with a transition period of 24 months or more – our view is that this will need extending further if something doesn't change.
With this increasing timeline in mind, it's important to remember that although governance requirements for trustees will usually begin tapering off once a buy-in is secured, some will remain – schemes that have bought in (but not bought-out) will still need to complete actuarial valuations, trustee reports and accounts and meet all regulatory requirements and expectations set by the Pensions Regulator. Trustees and sponsors who view a buy-in as the final step may need to think again.
Risk Warning
This article is generic in nature and should not be regarded as providing specific advice or a recommendation of suitability. No action should be taken without seeking appropriate advice.
There can be no guarantee that the opinions expressed in this document will prove correct. The opinions are also subject to change, potentially at short notice, should market conditions change. We accept no responsibility for providing updated views.
Figures refer to the past. Whilst this is used to provide context, it should not be relied upon as a guide to future experiences.
