It's all about the endgame

As Cartwright celebrates a record-breaking year, Yona Chesner, Head of Investment (North), provides an insightful overview of the buyout market in 2024 and explores upcoming innovations in endgame strategies for 2025...

2024: A landmark year

In many ways, 2024 was a landmark year for the bulk annuity insurance market. Approximately 250 schemes transferred their risk off balance sheet, surpassing previous records. In monetary terms, deals amounted to approximately £47bn, second only to 2023.

Three new insurers entered the UK bulk annuity market; Royal London, Utmost, and Brookfield. The first two have already completed deals, with the latter expected to write its first deals in 2025.

This level of market expansion hasn’t been seen since 2007 / 2008, and there are strong indications that this growth is here to stay.

From a Cartwright perspective, we have continued to play a pivotal role in this space in 2024, advising on 11 completed transfer deals (c. £200m) over the year – a remarkable achievement given our size in the defined benefit advisory space. Innovations we introduced to the market included:

Structuring the first deferred cover full buy-in policy for two schemes. This allowed sponsors to transfer all funding risks without fronting all the cash or incurring high borrowing costs.
Facilitating one of the smallest full buy-in exercises we have advised on to date, with a total insurance premium significantly under £1m.
Collaborating closely with the three new market entrants, enabling us to access significantly reduced early-bird pricing.

2025: Endgame alternatives

Looking ahead to 2025, we anticipate another record year for insurance transactions.

Rising gilt yields in late 2024 and early 2025 mean many schemes will see their solvency deficits decrease further. Increased market capacity and innovation will likely make the market accessible to even more schemes.

Much has been written about the run-on / risk transfer dichotomy. We have been working with several schemes that have specific reasons to continue running on despite strong funding levels. However, it is crucial to explore all costs and benefits when deciding against risk transfer.

For many smaller schemes, the disproportionate running costs mean that the excess premium charged by insurers has a payback time of only a few years (or less) compared to running the scheme on. Coupled with reduced governance and regulatory burdens and risk mitigation, full risk transfer tends to be the most cost-effective option for most sub-£100m schemes where affordable.

Innovations in the risk transfer market mean that alternatives to insurance are increasingly viable for smaller pension schemes. While there is still some way to go, we expect 2025 to bring further details of a future public sector consolidator.

And there is Clara Pensions, having announced its third deal in December 2023, with a total asset size of c. £230m, innovations in Clara’s approach mean that both smaller deals and those with solvent sponsors are now possible.

We remain close to Clara, and for some schemes, this option can be an attractive alternative to risk transfer to an insurer.

2025: The best way forward

Here are some resolutions we suggest for the coming year:

Foster open dialogue between Trustees, advisors, and Sponsors to understand the benefits and drawbacks of your options. You may be closer to a deal than you think, or waiting a year or two might be the right choice. We can provide a full breakdown of your options and a cost / benefit analysis of each.
Ensure your administrator is well-prepared to assist you through the endgame process. We have recently taken on several administration clients whose previous administrators struggled to prioritise getting their data ready for transactions. Clean data and a prioritising administrator are key to a smooth windup process post-transition.
Review your investments. Whether you are ready to transact or still have some time to go, a bespoke investment strategy can ensure that the range of outcomes aligns with your objectives. Starting conversations about any illiquid assets early can also be crucial for a smooth journey later on.