Introduction
While the global business environment continued its slow post-Covid recovery in 2021, the pension risk transfer (PRT) market defied convention with a substantial post-Covid bounce. Jumbo transactions (those above $1 billion in premium), plan sponsors eager to jumpstart their de-risking strategies, and significant retiree lift-out activity all contributed to a year of record-breaking growth.1 In this blog, we’ll look at the factors behind the 2021 PRT market’s blockbuster year and the specific market movements that led to success in its US, UK, and Canada segments, as well as some current facts on the ground that provide greater context for this year’s expected market activity.
The US Leads the Way
The US pension risk transfer market set new records in 2021, with an estimated total volume of $38.1 billion.2 It was also a banner year for pension buy-ins, with seven transactions totalling a combined $4 billion – an almost 120% increase over 2020’s total buy-in premium.3 The additional trend of large buyouts suggests that plan sponsors were less focused on expense management and more on risk management and transformation. Although experts have suggested several reasons for the US market’s sales surge – and for the global market overall – most agree on the primary root causes:
- Plan sponsors’ eagerness to continue their pension de-risking efforts once the markets improved over the course of the year;4
- Investment gains that helped many pensions approach fully funded status (on an estimated accounting basis, pensions accumulated sufficient assets to meet all the pension obligations they had made to current and future retirees);5 and
- Increased capacity, with new insurers entering the PRT market and existing players expanding capacity and improving competitiveness by using reinsurance.6
The US market growth also benefitted from several jumbo transactions, including JCPenney ($2.8 billion), Lockheed Martin Corp. ($4.9 billion), and HP Inc. ($5.2 billion), the fourth-largest deal in PRT history.7
Rule, Britannia
The UK PRT market also experienced record growth in 2021, with a total volume approaching £30 billion8 that tied the record for the second-strongest year in the segment’s history. A large portion of transactions included mid-market (<£2 billion) deals,9 while UK longevity risk transfers helped buoy the segment’s 2021 success, along with roughly £15 billion in expected swap volume.10 The market’s most notable jumbo transaction, the Metal Box Pension Scheme’s £2.2 billion buy-in, was another significant market driver,11 with improved funding and insurers’ increased appetite for new business also contributing to the segment’s outstanding performance.
Oh, Canada
The Canadian PRT market also benefited from 2021’s abundance, with $7.7 billion of transactions, up roughly 50% above 2020 sales.12 The market’s buy-in volume ($4.6 billion) was greater than buy-outs ($3.1 billion),13 and a blockbuster CA$1.8 billion transaction involving General Motors of Canada Company and insurers SunLife, IA, and Brookfield were other notable highlights.14 The market’s overall sales volume exceeded the previous annual record by roughly 50%, powered by the strong financial position of pension plans contributing back-to-back record quarters of sales volume to finish the year on a robust note.15
The Bigger Picture
The strong global PRT market is likely to continue for the immediate future, but for now, some more general sector-wide trends have become evident:
- Plan Sponsors. Plan sponsors are continuing to refine and transform how they manage pension liabilities, in particular, improving expense, risk, and data security management, and incorporating an objective of long-term full buyout with all the appropriate steps.
- Plan Funding Levels. Plan funding levels remain highly linked to financial market conditions, although they are not fully correlated. Nevertheless, some plan sponsors will remain fully funded, regardless of the market and will move ahead with transactions or borrow to augment funding.
- Market capacity. Market capacity is increasing through the entrance of new insurers and reinsurers to support market demand, with newer entrants competing for smaller deals ($25 million to $100 million) before attempting larger and more complicated transactions.
Final Thoughts
As the first quarter of 2022 concludes, the global PRT market momentum shows no signs of abating. In the US, several large transactions of over $750 million are already in the pipeline, so expectations are for a strong first half. For the UK market, growth should be driven by asset availability, the number of large pension plans coming to market, and the various opportunities predicted for small and midsize pension plans. For Canada, given the well-funded position of most of its pension plans, its market should remain busy for much of the year. But an important lesson from the pandemic’s early days remains: the window on the PRT market can change quickly as markets can easily turn and funding status can be fleeting. Activity can be episodic, so there is always the chance of a few bumps in the road despite greater indications of sustained market activity. But for now, with a wave of upcoming plan terminations, continued improvement in pension funded status ratios, and market capacity for multibillion transactions, PRTs should remain the option of choice for plan sponsors who wish to divest their pension obligations and focus on their core business for 2022 and beyond.
1 Group Annuity Risk Transfer Summary Report, Fourth-Quarter 2021, Mark Paracer, Secure Retirement Institute, LIMRA.
2 Ibid.
3 “Thriving Pension Risk Transfer Market Is Poised for Continued Growth,” Prudential Risk Transfer Outlook 2022
4 Ibid.
5 Ibid.
6 Ibid.
7 Ibid.
8 Legal and General Pension Risk Transfer Monitor, February 2022.
9 Op. Cit, Prudential.
10 Ibid.
11 Op. Cit., Legal & General
12 Group Annuity Market Pulse 2021 Annual Review – Canada, WTW, 2020.
13 Ibid.
14 ”Willis Towers Watson advises on CA$1.8 billion annuity transaction involving Sun Life, iA Financial Group and Brookfield Annuity,” April 2021.
15 Ibid.
