XPS Pensions Group plc (406.F) Earnings Call Transcript & Summary

Well, good afternoon, and thank you very much for joining us for this SBS risk assessment webinar and what is a blisteringly hot day in the U.K. I hope that you have found somewhere cold to spend the next hour with us. My name is Ash Williams, and I'm a partner in the XPS settlement team, and I'll be chairing the webinar today. We're living in a very interesting world from a pension perspective with the rapidly rising interest rates in response to inflationary pressures, meaning that for many pension schemes, these quite rapid increases in their funding position over the last 6 months. And has meant that for many of them, that is, therefore, brought in their period to buy out. So a key question is, what have these market forces done to the bulk annuity market? And how is the current market reacting that? And how does the future look for this particular marketplace? I'll speak to say we'll be taking it through a number of areas. And firstly, that we're taking through the current bulk annuity market, insurer pricing and insurer capacity. Then we'll be taking a look at the current views on longevity and how they might be impacting the insurance pricing. Then we'll be looking at the proposed changes in the Solvency II regime and how that might impact this market. And then finally, we'll take a look at the future of this market. Are there any opportunities for pension schemes? Are there any threats to pension schemes? And how all the insurers react to a potential increase in demand? And are we on the real cusp of change in this market? Firstly, I'd like to introduce our speakers for today and our panel. And firstly, I'd like to start by introducing our guest speakers. From Rothesay Life, we have Regina Chang. Regina is a key member of the Rothesay Life business development team, and she's worked on a whole range of insurance transactions, both at her time at Rothesay Life and previously at Aviva and L&G. We're also joined from Pension Insurance Corporation by Tristan Walker-Buckton and Tristan is Head of Pricing at PIC in 2006 shortly after its inception. Tristan has worked on over 50 insurance transaction deals and ranging from the very small sub GBP 100 million pension schemes, right up to the larger end of the market, and he was recently involved the EDS deal that was announced last week in the press. So welcome to Tristan, and welcome to Regina. From XPS, we're joined by Steve Purvis, Head of XPS [indiscernible] Team. Steve joined XPS in April and has led on over 100 bulk annuity transactions for over GBP 20 billion worth of pension scheme liabilities. He also has insurer side expertise and spent 3 years at Aviva as a head of deal structuring and origination. We're also joined by Dan Auton, Head of Longevity Analytics at XPS and Dan is a specialist pension scheme longevity expert and has been crucial in the development of the XPS longevity analytics tools. So welcome to Steve and Dan. Just a couple of bits of admin before we get started with the webinar. We have an hour for today's session, and we've built in plenty of time for audience questions. So hopefully, you will have lots of questions for our panel. And we would really like this to be an interactive session. [Operator Instructions] Hopefully, you're already aware that the desktop panels are interactive and you can move them around and resize them. So please do make the most out of your desktop space. If for any reason the webcast freezes over the next hour, please just refresh your page or press F5. Finally, there will be a CPD certificate available to you at the end of the session should you require it. So before we turn to our speakers, I'd just like to ask the audience a quick polling question to see what you have seen happen with your pension schemes over the last 6 months or so. So hopefully, you'll see on the screen in front of you now a polling question. So please can you select the answer that best represents your pension scheme and press submit, and we'll have a little look at those answers in a few seconds time. And if you happen to deal with more than one pension scheme, if you could just answer this question sort of a typical average across your schemes. And we'll just -- we'll have a look at the answers in a few more seconds. I'll just give that 10, 15 more seconds. I can see there's quite a few answers coming through, it's going up rapidly. 10 more seconds if there's anybody else that wants to answer that question. Okay. Perfect. I'll move on and let's have a little look at the answers. Great. Well, I think that's probably what we were expecting really from you. We're seeing that most pension schemes it seems have actually seen an increase in their funding position by funding position over the last 6 months. And I think that's pretty much what we're seeing across the XPS client base. We're seeing on average probably across our base and improvement in the buyout position by between around 5% and 15%. I mean it looks like there are a few schemes that were probably unchanged and a couple of schemes that might have got slightly worse. But that's really interesting. And hopefully, by the end of the session, you will understand a little bit more about why those funding positions have changed. And indeed, what that means for the future of this marketplace. So perhaps I could turn now Steve to you. If we could bring you in. Could you give us your thoughts on the current market, please.

Yes, sure. So I thought I'll start here with a chart showing deal volumes in the market over the past 5 years. And as you can see, the trend has been a pretty steady increase of transactions coming through with a bit of a spike in 2019 with a number of the Jumbo multimillion pound transactions going through that year. And we expect growth in this market to continue as pension scheme liabilities mature. And should the buy-ins or full scheme buyouts become more viable options for yet more and more pension schemes. First half of 2022 is really careful with this trend with a steady flow of transactions continuing and the usual pattern of a slightly slower first half of the year followed by what we expect to be a much busier second half of the year. But I think here's where things get more interesting. And as we've progressed through 2022, it's probably been the best time in more than a decade for pension schemes contemplated insurance transactions. So funding positions for lots of the schemes have improved materially this year as we saw a bit from the survey results there. And especially for those schemes who have not been fully hedged to interest rates. And many schemes are now in a position to consider a full scheme buyout transaction for the very first time. And in quite a few cases, well before a projected 3 or in some cases even 5-year journey plan. What's also helped here is that insurer pricing has improved quite significantly. I think if we just turn to the next chart. So this chart here shows the implied yield on bulk annuity pricing. And these sort of charts are quite significant for pension scheme funding. And what you can see here is how pricing for an average scheme on a good day in the market looks up until the end of June. And you can see the improvements there. In practice, particularly the larger schemes, we've seen pricing perhaps even 10 or 20 basis points better than this. So some really strong pricing opportunities for well-prepared schemes at the moment. So part of this is down to yields going up and credit has been widening during the first half of the year. But there are a number of other factors as well. So the main one to be in competition from insurers from the relatively solid start to the year and long-term pricing reducing, which then I'll come onto in the next segment today. But combined, these factors are helping to create a bit of a perfect storm for improved affordability for pension schemes and some really strong pricing opportunities in the market. So to bring this to life a little bit more. We've overlaid this slide with XPS DB U.K. analysis, which really aggregates the funding positions across all the private DB schemes in the U.K. And you can see here what a really dramatic impact these factors have had on some of the positions this year. So taking this on the right, you can see a dramatic improvement from an aggregated position of around 70% buyout funded across the U.K.'s DB pension scheme population to something which is now in excess of 85%. So a pretty remarkable improvement in the year-to-date so far. So to the next slide and a little bit of an overview of the market for the past couple of years. And as you can see now, there are 5 insurers with broadly equal market share: PIC, Rothesay and L&G who have been mainstays of the market for many years now. But also the emergence of Aviva and Standard Life who have significantly grown deal volumes over the past couple of years and really helping to drive increased competition over that last couple of years. Drilling down a little bit further, and the market for smaller schemes is important to consider as well. And as you can see, it tends to be focused around the 4 insurers on the bottom left box with the market widening out a bit for the mid to large transactions as we've captured there on the box on the line. So to summarize, because of these factors, we're seeing a huge surge in demand for schemes approach in the insurance market, both in the second half of this year, lots of others following suit already for 2023. There's lots of work going on behind the scenes with schemes looking to lock down these funding schemes and lots of work being accelerated to get schemes ready to transact next year. We're also tending to see a lot more full scheme buyout transactions than ever before as well as deferred heavy transactions from those schemes who have already completed pensions schemes from buy-ins in the past and now at that point in their funding journey where they can afford that the residual population for a full scheme buyout. So in short, it does really feel like the landscape is starting to change in the market.

Okay. I've already had a few questions and we'll take a couple of minutes now to take a few of those questions. And Tristan, maybe I could bring you in first from an insurer perspective. Perhaps you could give us a couple of points on what you see as the demand for the rest of the year? And is it spread across schemes of all sizes or is it just larger schemes approaching the market at the moment?

Yes, I think it's spread across all schemes, all different sizes. From the start of the year, we were, as Steve said, kind of expect 2 years to be quite back-end loaded to be quite a busy period right now. And frankly, that's just got busier. It's around about now that I think we're seeing the impact of the proving funding levels in the earlier months. Lots of schemes are kind of coming into market that weren't earlier on our radar. And yes, that's across the full range of opportunities from below GBP 100 million to really very, very large.

Excellent. And maybe Regina as well. What are you seeing with regards to the challenges around the gilt yields rising and therefore, the average deal size is getting slightly smaller. So we've got potentially a slightly busier marketplace, more schemes that can approach the market but reducing -- sort of reducing average deal size, is that providing any challenges at the moment in the market?

Ash, yes, I agree with everything that Stephen and Tristan have just said that the market is definitely getting busier. I think we're definitely seeing a lot more larger schemes approaching the market kind of second half of this year into next year. Rough to say as an organization focused more on the larger end of the market. So I guess as gilt yields rising and deal sizes are getting smaller, it probably means for us that we are looking much more at the larger -- at the larger end. That's also kind of compounded with the fact that we are hearing of a lot of large kind of GBP 1 billion trust, GBP 1 billion-plus transactions just about to approach the market. And so it may be the case that and even the very large schemes, we're not able to quote on every single one of them coming in.

Okay. Thank you very much, Regina. So yes, we had quite a few questions coming already. So I think this question probably -- maybe I can direct this question at you, Tristan. So we've had a question come in that says we've seen these improvements in pricing. Is that applying to both buy-ins as well as buyout?

I think that's true. I mean the drivers for improved pricing, interest rates, wider credit spreads, longevity possibly reducing a little bit or certainly having an active reinsurance market. That applies to both buy-ins and buyouts. I think there's perhaps a bit more scope for it to apply for buyouts as there's a bit more sensitivity there around some of those longer-dated liabilities. The interest -- rising interest rates is helping some of our capital calculators on that. So perhaps a slightly more beneficial for buyouts, both are looking good. And in terms of like the increase in activity that we're seeing, we are seeing, as you said, kind of more buyouts coming to market, more deferred heavy buyouts, and frankly, those schemes, I've suddenly realized that, I'm now around being 5 years plus out from my end game, I'm now well within 2 or 3 years or even possibly it's now it's here.

Okay. Excellent. Thanks, Tristan. And Steve, perhaps your best place to answer a couple of questions you had through on the Q&A. So the first question is, if a scheme can afford buyout, should it buy out?

So I think it depends on the relative strength of the covenant between the sponsored employee and on the insurer -- insurance company. But I think in most cases, trustees will get to the point where they feel buying out with insurer or buying in with an insurer would be an improvement to mend the security. So I would say if the funding is there to support it, then I think trustees really need to consider carefully potentially missing an opportunity by not buying out and taking us steps to improve security for members benefits.

Okay. And another question for you. I had a question coming around what sort of size deals is being favored by the insurance market at the moment. Can you give us a bit of flavor of what kind of deals are getting the best sort of the best engagement?

Yes. I mean I think we've seen engagement across all deal sizes, really. I think at the market at the moment, these large transactions are all getting 4 or 5 insurers bidding on them. So quite a lot of competitive tension in there. I think at the smaller end, it's always been a bit more of a challenge to get competitive tension for the sub GBP 100 million transactions. And we're really seeing a bit of a pickup at that end of the market in schemes using streamlined approaches to the market. So we've got our own XPS called expedite and the idea being that it makes the quotation process easier for insurers. Our legal time with the LA and prenegotiated contracts means that deal execution is quick and cost effective, which will help make it more likely for insurers to bid at the smaller end. But that's really where the pinch point is just now. And like Regina said that a lot of larger transactions coming through the back end of this year and into next year. So there may be some capacity issues there. And is the case of what you [ pace ] on those.

And I think probably one final question for you on the Q&A at the moment is a question around how is the market divided between insurance transactions and potentially schemes doing things like longevity swaps to run themselves off in the longer term?

Yes. I mean I could probably ask the insurers, the question around that as well. But I think what we are seeing at the moment is as we're [ heading ] towards bulk annuity transactions are applying to buy out. There are a couple of large schemes contemplating longevity swaps at the moment. But it feels quite heavily weighted towards full scheme buyouts because of that affordability improving so much.

Excellent. And a question maybe I could bring in Tristan again, a question here around what trustees need to do to prepare for approaching the buyout market. And is there anything they can do to make scheme more attractive, especially in a busy marketplace?

Sure. Sure. So I'm just keen to -- kind of as you described, the market is getting bigger. There are more quotes coming in or [indiscernible] again, which is great because average liabilities are coming down and my targets have been good as at the start of the year. So I kind of need to quote on more schemes, need to kind of write more deals, and I was expecting to just kind of hit our targets. So it's good that we've got more volume coming in. But equally, our resources haven't seen like that kind of same increase. So we're trying to quote on more things with the same number of people. So what I'm really focusing on and PIC as a whole of market insurer. What I'm really focusing on more than ever is transaction certainty. So I'm looking for RFPs that tell a good story that some proprietary work has already been done in terms of the kind of feasibility assessment or desktop analysis, as sort of a likelihood of a transaction, I'm not putting a quote out into either and it's just there for interest. It's a valid viable quotation. Schemes that have done a bit of proprietary work on their formalizing their benefit spec that's helpful to me. There's nothing in the woodwork on benefits that can come out and make a deal fall away, some data cleaning can be helpful as well. But really, I'm just looking for a nice story and a nice set of transactions so that a greater number of quotes I put out there, will end up in a transaction. Not necessary PIC. We don't mind losing to other insurers, but we don't like seeing quotes go out there just certainly to transactions.

Excellent. Tristan. And Regina, maybe I could ask this question of you. And so I had a question come in around whether insurers can provide sort of the right levels of member service compared to perhaps a more traditional administration teams that the trustees are using?

Yes. I think Tristan is right. I think as the market gets busier, insurers are going to have to triage. And the proposals that are coming in and -- work on the ones that they think they're going to be most successful at winning and also those have execution certainty. So having experienced advisers in place, having your governance structures in place, having your assets in a good position. They are all key things that we look at. And one where kind of triaging quotations, I guess, insurers all have their sweet spot in the market as well and they have things that they prefer. I would say we seem to be more competitive on buyouts and longer duration transactions that include deferred. So that's usually where we put our attention when the market is busy. In terms of admin, I think that it's an interesting question, but insurers -- look -- and at PIC, this is our sole focus. This is all we do. We set up to pay people's pensions and our admin has been built accordingly. So I think that you can get just a good a service with an insurer as you can from your current administrators.

Excellent. Thank you, Regina. Maybe this is a question for you, Steve. We've had one come in around a very small scheme, 90 members split broadly equally pensioners and deferred. Is there a marketplace for these kind of really smaller schemes?

Yes, there definitely is. We've taken schemes of a similar size of the market this year. We've had 2 and sometimes 3 reinsurers bidding on those, reasonably good pricing on those transactions. I think going back to the point early, you're using a streamlined process like expedite, making sure a lot of the preparation has been done already, because what insurers don't typically like is a protracted buy in to buyout period on the smaller schemes. So with a lot of preparation and approaching the insurers in the right way, that it's possible to get transactions like that done. And we've done this year, I think we've done some deals up to GBP 1 billion, but as low as GBP 1 million. So it's possible to get the full range. But it's just important to adapt the approach to market for the size of the transaction.

And does that mean we see for the smaller transactions, those schemes would have need to have done things like GMP equalization before they even approach the insurance market?

Yes. I mean it's not absolutely essential to have done that. But I think the more that's done, the more attractive those schemes will be. So if you can present yourself to an insurer where GMP reconciliations are being done, GMP equalization is being done and that transition from buy-in to buy out is relatively straightforward. Then that will help that scheme stand out versus the scheme who has still got quite a lot of ways to do post transaction. So I think all things equal, if that's being done, then that will improve scheme's chances of getting competitive tension and a good price in the market.

Excellent. And then, Tristan, maybe I'll bring you back in. Are you seeing sort of less well prepared schemes approached the market now. We've seen obviously potentially a large jump in funding over the last 6 months. Does this mean that many schemes are sort of rushing out to market and perhaps not ticking the right boxes with the insurers?

I think that's -- yes, I think that's fair. Like I said, right now, we're seeing the fruits of the perhaps unforeseen jump in funding levels in recent months. So we are now seeing more requests where "could you give us a quote." "Here's the data is not quite in kind of final form." "We haven't got the benefit but here's a summary from our valuation report." And yes, there's schemes have been caught very slightly on the half. And frankly, quite recently, they want to make sure that they're not missing out on a market opportunity, maybe this might be here in 3 or 6 months' time. So we are seeing less well prepared schemes come to market, being frankly, for the larger schemes. That is not a problem at all for me. I'm quite a particular "kind of help feasibility" and I'd rather those schemes kind of picked up the phone to me now rather than wait 3 or 6 months to triage all their data and benefits and potentially miss an opportunity. It does mean that for the smaller schemes that are perhaps a bit less well prepared, they might get slightly crowded out compared to the schemes that are better prepared..

Excellent. Thank you very much, Tristan. I'm slightly conscious on time, but I think we've got a couple more questions. I'll ask here and there have been a few questions come through that I think will actually be answered by the sort of the speakers later on anyway. But perhaps just a couple more in the section before we move on to Dan. So one question that's come in. Probably for you, Steve, to give more round view of the whole market. But again, around GMP equalization. So what message did GMP equalization or insurers are able accommodate now across the market?

So we've seen insurers accept both. This seems to be a trend now for dual records for C2 or B2 methodologies. So it seems to be moving in that direction. So I think that's really the way we might end up. Having said that, a lot of schemes used, conversion, for different reasons, perhaps to wrap up different exercises and that's acceptable to most of the insurers as well. But for most of the schemes we are looking at, the dual records methodology seems to be the best one at the moment.

Thanks, Steve. And then one final question for you before we do move on to the next section. We'll pick up a few questions later on. It's been noted from the audience that potentially doing a full buy-in can introduce a large accounting impact, which may be of particular importance to the sponsoring employer. Are there any ways of sort of mitigating that or managing that risk?

So I think a few questions have probably -- would need answering in a separate session. But I think typical ways of managing that risk might be to do a transaction in phases, so perhaps multiple buy-ins over time, gradually derisking assets can help with that transition to make it less of a hit there. And then when the transaction is done, there are various mechanisms to avoid certain accounting treatments, which could be done. So I think there's various ways to do that, but the most typical that we see is to face transactions over time rather than one transaction from an underfunded scheme. So a full buyout could have quite a big account in here. So that will be the main way to try and manage that.

It's probably an important thing to sort of consider on a scheme-by-scheme basis, Steve, is that right?

Yes. That's right.

Yes. Excellent. Perfect. Okay. Well, there's excellent questions. And we'll pick up a few more later on. And I'm keen to move on to our next section now, and I'm going to turn to Dan to bring in his expertise on his latest views on longevity market and how they might be affecting sort of funding levels and insurer pricing. So Dan, can I bring you in and hand over to you, please?

Yes, of course. Today, I want to talk to you about the impact the pandemic has had on longevity, including how this may affect pension scheme funding levels as well as the cost of actually hedging longevity risk [indiscernible], the swaps or annuities with reinsurers and insurers. Now over the past few years, the pandemic has had a dramatic impact. And it's resulted in the higher mortality rates than we had expected. This chart shows mortality improvement from year-to-year. Very simply, any point above the line correlates with an increase in life expectancy, whereas any quite below the line represent a decrease in life expectancy. As you can see, generally, mortality improvements are positive, representing increasing life expectancy over time. For this chart, we've compared 2021 with 2019 to just kind of isolate the impact of the sort of 2021 versus pre-pandemic position. But clearly, both 2020 and 2021 have been significant shocks and are clear outliers from a typical range that we might expect. I hope we're going to see shocks this again any time soon. But actually, in isolation, these 2 short years have probably not actually have too much of a material impact of funding levels or insurer pricing. You're sort of thinking maybe 2% to 4% reduction in the scheme funding liabilities versus where we were pre-pandemic. However, the pandemic has had lots of other implications as a result of repeated lockdowns and complications with actually catching COVID-19 long period. We've also seen NHS waiting times increased dramatically. Reduction in cancer screening and slowdowns of research into new treatments for various causes of death [indiscernible]. The amounts the government is borrowing as well during the pandemic were likely to have a knock on impact on the amount the government can spend at some point in the future, in particular on things like health care. On the other hand, though, there were fewer non-COVID deaths during the pandemic. We also expect survivors in general, to be healthier, and there are likely to be improvements to various vaccine production as well as hopefully rollouts of those vaccines as well. Overall, we believe the factors reducing life expectancy are likely to outweigh those increasing life expectancy. And as a result, we expect team liabilities to reduce by somewhere between 1.5% to 3.5% on a best estimate basis versus the pre-pandemic life expectations. The range here represents the fact that different members have been impacted differently, depending on as to where they live in the country, how old they are and what their current ailments might be and so on. It's also important to note that whilst we expect on a best estimate basis a small reduction in liabilities. There are actually feasible scenarios where life expectancies have increased as a result of the pandemic. For example, it could have sparked the population to be significantly healthier in the long run or government spending on health care to increase dramatically. Now we don't see this as the most likely outcome. It does mean that there is probably more longevity risks now than there was pre-pandemic. And it's really important to note when we come to look at this and where we come -- where we expect pricing to have come. After all, the more risk there is, the more it's likely to cost to actually insure that risk. Moving on to insurer and reinsurer [ vehicles ]. I'll just preface this section to say that insurers and reinsurers very understandably can take a more cautious view on updating their life expectancy predictions often taking longer to reflect sharp changes in trends in their life expectancy most. The continuous mortality investigation, or the CMI which produces the CMI improvement models each year and the various other industry standard tables. They carry out a benchmarking survey of insurers and reinsurers. The CMI has compared the responses it got at the end of 2020 to those it got at the end of 2021. Now If we look at the average difference between 2020 and 2021 across all of the responses that we're given. We saw a small reduction in life expectancies, so somewhere between 1% and 1.5% overall. There's also a follow-up question in the survey, which asks reinsurers and insurers their views for the long-term impact of the pandemic on life expectancies from 2022 onwards. And over 50%, just over 50% suggested they will be making no additional adjustments to that at the end of 2021 life expectancies with others changed more reductions of 0.5% or 1%, respectively. So overall, the picture we're getting here is that reinsurers and insurers generally expect to be a slight -- small reduction in life expectancy compared to pre-pandemic expectations. Now in terms of what I think we might see in the market. I think we're unlikely to see the pandemic itself have a material impact on longevity pricing. Actually, market movements and insurer and reinsurer appetite will likely be much more material to pricing. And any falls in life expectancies as a result of the pandemic. So what we're seeing is a slight fall in the life expectancy under a best estimate basis. Given we are also expecting an increase in longevity risk. This will mean that these falls in the life expectancies probably won't be passed through direct interchanges in pricing. And if they are, then possibly only to a small extent. After all, more longevity risk generally means cost of hedging of that risk will also be higher. And this doesn't mean that if we compare the cost of hedging longevity risk now compared relative to our best estimate life expectancies compared to cost pre-pandemic. We will expect the cost to have actually increased. That doesn't mean that it's not cost effective to ensure this risk as longevity risk itself has increased. So you're paying slightly more relative to best estimate basis, but you're also moving more risk. This does, of course, assume that reinsurer appetite for longevity risk is unchanged, which may not be the case, and there could be some really good deals out there to be had. I think this will be driven by reinsurer appetite rather than direct impact of the pandemic itself and it's personally impacting life expectancies. So just to summarize in a sentence, if I can. Longevity-hedged pricing and bulk annuity pricing may have decreased very slightly as a result of the pandemic, but not to the same extent as expected for earlier levels from reduced life expectancies. And then any case pricing is likely far more impacted by reinsurer appetite of longevity risk and not going to impact on the pandemic or life expectancies. And with that, I'll pass back to you, Ash, for any questions that might come through.

Great. Maybe I could maybe ask by just asking a question to Regina. So -- what are you seeing in the sort of longevity reinsurance market? Are you seeing any kind of pricing reductions come through? What's going on with sort of supply and demand in that market?

Yes. Thanks, Ash. I think Dan gave a really good summary. I think -- at the moment, we are seeing reinsurance pricing has got slightly cheaper at the moment. But as demand picks up, it will be interesting to see how the reinsurers react to this and what will happen to pricing in the next half of the year. What I'll say, we're in a position where we don't always reinsure our longevity risk upfront. So we often will hold longevity risk and reinsure it later on as part of a kind of clumping a few transactions together and reinsuring it off our back book. And we sometimes find that when there's more kind of execution certainty, which you've already won the deal that reinsurers are a bit more engaged, especially as the market -- company gets really busy.

Okay. And Tristan, in response to sort of questions coming on the Q&A, Dan sort of suggested the data is pointing to life expectancies reducing potentially some more center states as well as pointing towards that. At what point do you think reinsurers will start reducing, if at all, will start reducing their pricing to kind of reflect this data? Have you heard anything in those markets?

I mean, we've started to hear very little noise -- small noises about that we are seeing some positive set of data life expectancy to kind of come through. Fun enough, when you talk to the reinsurers, and they are giving you good pricing, they always bake in to tell you that we're giving you good pricing because we tried really hard, and it's a good price rather than just -- why define demographic trends. So it's quite difficult to unpick. But yes, I understand that the ONS data from the census last year kind of ready now, it's going to start feeding into the CMI model next year, maybe we might start to see some reinsurers making some allowance for that from early part of next year. I hear some mutterings that reinsurers are being, don't want to say the word believe, but being reminded from by various advisers and brokers in the market like, when is this coming through? When is this coming through? So I mean maybe in the short term, we will see some slight more benefit come through.

Okay. And so mindful of time, but Dan, maybe I can bring you back in for a last question and possibly a fast follow-up question to that. So we've had a question come through around any thoughts about the impact of climate change on longevity. A very pertinent question, given the heat today. But then potentially, Dan, could you follow up after answering that, and just talk about should a scheme that could potentially afford to buy out, would you advise potentially waiting to allow for some of these longevity reductions to potentially come through or is that point around risk and the change in risk still worthwhile ensuring at this point?

I think I might just answer the second question first because it's quite a simple answer in that for if you can to buy out to the comments made earlier on implied covenant versus insurer covenant. Then you would expect trustees to make that move. And in terms of waiting for better pricing, I think we're seeing some quite, actually in that where we're sort of waiting on reinsurer appetite and that as at market pops up towards the end of the year, the reinsurer appetite and the competition there might mean that prices go the other way and it becomes more expensive. So in terms of waiting, I don't think it's necessary work worth it and reinsurer appetite is going to be driving things much more than necessarily waiting a year or 2 for slight reduction in life expectancies to come through. For the first question about climate change, I think that's a really, really interesting question. Because you could quote what I stated between what is a direct impact of our country getting slightly hotter. Ultimately, we'll probably have fewer COVID deaths. And slightly more heat -- heatwave deaths. Certainly, in periods where we're getting 40 degrees heat. But ultimately, once you analyze the sort of the balance between those two. The impact on overall longevity or life expectancy across the whole of the U.K., just likely to be very, very minimal. And actually, the way we go about implementing any climate change policies and things like that are not going to impact on sort of the economy and on employment rates and health care systems, that sort of things. It's far more likely to be more material on life expectancies. So it's really uncertain at the moment. I think that actually policy changes are not going to impact in terms of the services are likely to be to be far more significant than any changes in heat that we see.

Great. Thank you very much, Dan. So I think we'll move on to the next section now, and this is another area of potential change in the buyer market and that's around potential changes to the Solvency II regulations. So Steve, can I bring you into give us a summary of what proposed changes are and how, in your view, they might impact the market?

Yes. Thanks, Ash. So as a very brief introduction, Solvency II is the regulatory regime, which all insurers in the U.K. operate. This regime was written into EU law and really determines the amount of capital held by insurers, and the assets those insurers can invest in. And today, it's been working really well with all the insurers in the market reporting really strong balance sheet well in excess of the regulatory levels required. During the early part of this year, however, there's been lobbying to change to a Solvency II operators, which become a bit easier to do in the U.K. as it exited the EU and became less bound by the Solvency II regulations. So this [ consultation ] is well underway now and due to finish later this week as it happens. But it was considered by the U.K. Treasury as a potential Brexit dividend to try and make U.K. insurers a bit more competitive internationally to help increase the ability for insurers to invest in a wider range of assets, particularly long-term infrastructure assets consistent with the U.K. government's climate change agenda. The main focus of the proposal has been on the capital reserving requirements, which are very, very complex. I am not going into too much detail today. But those capital reserve and requirements include margins to withstand a minimum of what is one in 200-year events. One of the layers of these reserves and requirements is known as the risk margin, which generally makes longevity risks expensive to hold, for example, and really the main reason why lots of insurers will reinsure longevity risks. The risk margin is also quite sensitive to interest rates, which can create some volatility on the insurer balance sheet and hence, the lobbying for change across the industry. These proposals have included a 60% reduction to the risk margin, which, to put into context, means a reduction in the capital that insurers need to hold of several percentage points, which could significantly reduce the capital that insurers need to write new transactions. So in itself could help reduce bulk annuity pricing. However, the other main component under Solvency II is called the margin adjustment, which is the mechanism that insurers used to recognize returns on assets above the risk-free rate of return. Again, this is quite restrictive with any easements, meaning potentially a wider availability of assets for the insurers to invest in and to increase incentives to invest in long-term illiquid assets in the U.K. economy. From what we've seen so far with this consultation, what appears to be happening is a bit of a tussle between the U.K. treasury keen for these changes to the risk margins to go through on the capital side. And then on the other hand, the PRI to protected the level of policyholder protection already in place and potentially using the margin adjustment mechanism to offset the changes to the risk margin to, therefore, preserve the level of capital currently held by the insurers. So I think this will be interested to hear the views of our guest insurers on these proposals. But from our analysis and after all the headlines earlier this year, the net impact looks like a broadly neutral one, and we've continued to advise our clients that things like interest rates, inflation, longevity pricing and really the big factor, the demand and supply dynamics will have a much bigger impact on future bulk annuity pricing.

Great. Thanks, Steve. Well, let's turn to our insurer guests and see what their views are. So maybe Tristan, if I could start with you, sort of what's your take on these proposed changes? And is it likely to impact your pricing or your capacity to write deals?

I mean it's a little too early to say, Ash, at the moment. So as Stephen said the consultation is due to end this week. This is the responses from insurers are going in this week have been [indiscernible] response. So it will be a little while until we know where these kind of this balance ends up. As Stephen described as well, the PRA has a view, U.K. Treasury, government treasury has a view and who knows if the view of treasury is going to adjust in due course when we finally have a new chancellor. If I had to guess that and not want to [ preach ] as to the outcome of the consultation, I think it will come out more or less a wash. I think some of the PRA's suggestions perhaps maybe skewing having some unintended consequences and as restricting some of that asset eligibility criteria unintentionally that -- yes, that was previously brought up as a win and restricting the level to which insurers investing kind of long-term illiquid assets that are beneficial to the U.K. infrastructure. So yes, I think it'll be a little bit of [ oscillated ], but frankly, another way, where I see the good news option or the bad news option, it's still not very big either way. And as Stephen said, kind of a little bit dwarfed by some of the wider market movements we're seeing.

Thanks very much, Tristan. And Regina anything from your point of view?

Yes. I think much the same. I think the changes to the risk margin are appreciated from an insurer perspective, as it kind of the way in which is constructed, it's quite difficult to manage the risk associated with it. However, the kind of capital savings have been kind of batted around 10% to 15%, are not really achievable. I think they're more kind of based on the team that transitional relief insurers has run off and that we only insure probably about [ 50% ] of the longevity risk. Most insurers have reinsured a lot more than that. I think 80% of [indiscernible] that book is reinsured for longevity risk. So the capital release numbers will be smaller than that. And I also think it's the same for new business. Most people do not assume 50% reinsurance when pricing new business, it's quite a lot more than that. And as Tristan said the proposed process, the margin adjustment are moving in the opposite direction where they're having kind of a slightly negative impact on the capital increase there.

Okay. Thank you very much, Regina. I'm keen to move on to our next section, which is looking at the future of the market. But I think we can just sort of summarize those changes there as potentially -- still a little bit uncertain on what those changes might be to the Solvency II arrangements, but it does sound like a view of our panel is that potentially not hugely impactful on price and capacity and certainly dwarfed by other -- potentially other factors in the market. And so Steve, I'm coming back to you now for the next section, where we're going to look at the future of the market. And are we actually on the cusp of a significant change for this market.

Thanks, Ash. So we've talked about the current market and some of the near-term changes starting to come through. Looking further ahead into the future. And as you can see from this next chart, our projections, share funding levels improving quite quickly, and we're expecting around GBP 500 billion to transfer to insurers over the next decade. So a huge demand coming through and a change in focus from a market dominated by pension early buy-ins to now larger transaction volumes and more full scheme buyers. We think it's unlikely that demand will hit the market in a uniform way, and there will certainly be peaks and troughs. So potentially some capacity crunches, but also likely to be some very attractive opportunities along the way as well. I think it's also interesting to see here the composition of the transaction sizes that have gone through in the market. So we've split them here between the small, let's say, sub GBP 200 million, medium up to GBP 1 billion and then the larger transactions. And I think really the biggest challenge for the industry is going to be around the 5,000 or so smaller pension schemes across the U.K. So currently, the insurer take on around 50 to 100 of these small scheme by our transactions each year. So gearing up for insuring a big proportion of these schemes over the next decade will be a really big challenge, not least on the [ results ] side, on the -- from the scheme business perspective, and on the insurer side where the [indiscernible] often needed to price a small scheme is for the larger scheme, but streamlined in the way insurers price and transact these schemes will be key to [ unlocking ] this I'm sure. I think the industry itself is also under massive pressure on the administration and operational side of this trend towards buyout. So pensioners buy-ins is a relatively straightforward to implement for insurers who sometimes just even make fix [indiscernible] payments to the scheme each month, who then continue to [indiscernible] as normal. But as we see this momentum shifting towards full scheme buyouts, the work required on both sides will be much greater whether that's getting schemes transaction-ready, implementing GMP equalization work, or just the work involved in the transition across the insurers administration systems. So pricing-wise, I think, some great opportunities and schemes in insurers over this next decade, but big capacity challenges, particularly on the admin and operational side of things. So wrap up this slide, we've taken 4 key takeaways, which I think are important for everyone to consider. So number one, keep a really close eye on funding levels in this sort of environment, very volatile conditions. Annual check-ins are no longer appropriate when the scheme might be going through significant funding changes. So it's important to be alive to those and just stay close to what's going on much more regularly. Number two, review an investment strategy. So can you lock into some of these recent gains, how's your journey plan just accelerated and you need to derisk assets further another things that we've seen quite a lot at the moment is around illiquid asset holdings where schemes full buyout funded but having liquid assets, which are more difficult to dispose of particularly in the secondary market. Number three, consider resourcing for [indiscernible]. So like I said, the industry is certainly under pressure just now. So capacity constraints should be considered strongly in terms of getting scheme transaction ready. So even starting work now to position your scheme for future windows of opportunity. This work is going to -- need to be done at some point. So it's best to leverage what you can now rather than possibly letting another opportunity pass you buy as those pricing opportunities present themselves. And finally, what can you do to increase insurer engagement when the time is right. So things like it's clear benefits spec, clean data and a clear path to deal execution are all attractive to insurers as is the way the scheme is taken to market. So understanding where your scheme fits in the context of the bulk annuity market and coming up with an approach which is fit for purpose is a really important consideration when planning to approach the insurance market.

Thanks, Steve. Regina, are you seeing what Steve's saying in terms of the potential for the increase in this market over the next few years? What do your pipelines look like?

I think the market is going to be really busy over the next few years. I think anchoring everything we said at the start of this webinar with a kind of increased demand. I think that insurance are gearing up for a very busy next year. I think our biggest strength is going to be human capacity and the ability to quote on all of these transactions, which we briefly touched on at the start of the year. So there's going to be material demand in the coming years.

So what are you doing, Regina, to help improve the capacity to write deals? You talked about the human -- sort of human resource constraint. Is there anything you're doing there to help improve that?

I mean Rob have been growing that team for the last few years. It's not an easy thing to get kind of experienced people quickly into your change. I think as the market matures more, you'll see more kind of factories and people moving from kind of traditional consulting into the insurance world and teams will grow that way, but it is definitely something we're focusing on and doing -- and recruit people.

Great. And Tristan, with all this extra demand coming through, do you see the sort of supply and demand dynamic tilting in your favor? And is that good news for you? Are you going to be increasing your prices?

I'd love to think so. And every so often when we kind of go through some of these peaks and troughs, you think, oh, it's finally an insurer's market. I think when it was Steve earlier saying that for some of these transactions with insurer capacity constraints you move from, I don't know, maybe getting 4, 5 bidders to 2 or 3. From where I'm sat, 2 or 3 years still -- well, it doesn't feel like you have an easy ride when you're bidding on those deals. I think 2 or 3 committed insurers who have bought into some story or transaction certainty is sort of plenty enough to give you competitive tension. And even stepping away from that, you still got to -- insurer has still got to work within scheme affordability constraints or sponsor abilities to fund deficits. So no, it's not giving us a free lunch, but it's kind of making that we have to be perhaps a little bit more choosy about the prospects we see. What we're also seeing as well, actually, I think it's not just resource constraints on the insurer's side, but on might be the adviser side. Well, in a way you're going to fund the lawyers, all the benefits specs or the advisers on the actuarial side to broke the transaction.

And Pixar sort of all in -- all of market insurer, you insure some sort of the smaller deals, right, through the larger ones. Are you coming talking about we've got thousands of these small pension schemes. Is there a possibility they get crowded out of the market? Will there still be a marketplace in a few years' time for those schemes? And is there anything they can do to increase their engagement?

So I think -- I mean, they -- as our capacity -- as the market is big or smaller, capacity kind of stays the same. We always have kind of started to pull up the drawbridge at the smaller deals first. So previously, I would have said, okay, pick quote on most transactions above, say, GBP 25 million, GBP 30 million. If you ask me today, that's probably GBP 40 million going on for GBP 50 million. So we do start to draw things up. And in the past, I would perhaps be a bit more prepared to quote on smaller transactions on a more speculative basis. I think there is a risk of them getting just crowded out, but I think any transaction that comes to me saying, we're prepared, we are ready to transact, and there's a nice straightforward process for me to engage in, we would still be quoting that. We've actually done quite a lot of smaller transactions throughout this year. I've got a few more lined up for the next month or so. Yes.

Okay. And Regina, perhaps I'll come back to you. So are we starting to see a point in the market where insurers might ask for exclusivity a bit earlier in the process or any work exclusively with schemes? And indeed, sort of another take on that question, is there -- are there some benefits to partnering with an insurer early?

I think you might see benefits from smaller schemes kind of suggesting exclusivity or partnering early with an insurer. You might get more engagement because it's not invest in process, and it isn't a waste of resource. I think that, that's more of a tricky decision and something that the other side with their advisers, what's right for their scheme. I think you will potentially see less insurers quoting on every transaction as we go into the next year or so purely from a resource perspective. So you'll see insurers quotes in the assets where they feel like they've got the best chance of securing the business. I can't remember, the last part of your question was?

Yes, just around partnering and going -- all the benefits to it.

Yes. I definitely think there are benefits to partnering with an insurer, and I think it's in the name. If you partner together, you're working together to achieve a common goal and the aims of both get that scheme and insurer making sure that you get the best outcome for everyone. I think there's also a cause for a competitive process, too. I think that's definitely down to kind of the trustee aims and goals.

Okay. I'll do one final question, so I mind for the time. We do want to finish within the hour. If I could turn to you, Tristan, for this final question and if you could keep it to sort of 30 seconds or less. So how do you think consolidators would affect the market and to how they're going to impact the insurance market?

Smaller than a 30-second answer, Ash, but I think there was certainly a place for consolidators. There is a section of schemes that probably aren't -- can't get to full by within a reasonable period. We are seeing them on more and more cases. It's held with that they are kind of triaged out there. So if the advisers where they trustees go is my scheme right with the consolidation or is it right for buy-ins or buy-outs because where we're seeing schemes approaching like specific approach, that just creates a little bit of confusion.

Excellent. Thank you very much, Tristan, for keeping that brief. I'm sure we've a lot to say about that. That question will probably be a webinar in itself. So well, thank you very much, speakers, and thank you very much for all the audience questions. That's really brought this session to life. So thank you very much for the audience for that. I do know that we haven't been able to get through every single question. So we will follow up after the webinar by e-mail or any questions that we haven't explicitly picked up during the session, but just from a bit of a wrap-up for me then. So we've heard from our panel today that the insurer pricing has gone materially better over the first half of this year, and that's leading to many pension schemes having a much healthier buy-out position than they did before. And then this is likely to lead to a sharp and probably sustained increase in insurer volumes over the coming years. So it's becoming critical and really important for schemes to well prepare themselves for a transaction. It's becoming really important for schemes to be able to identify and react to opportunities in the market, noting that whilst the demand might be increasing, it will be quite lumpy and may there be windows of opportunity with certain insurers to get very, very good pricing. Steve gave us a few tips that are still on the screen here. Keep a close eye on your funding position, review your investment strategy, and then sort of do your journey planning earlier to be able to position the scheme to take advantage of opportunities and engage with the market. So I hope today's session has been really informative and interesting. I say thank you again to the audience for their questions, and thank you very much to our panel for their really interesting insights. In particular, thank you, Tristan. Thank you, Regina, for taking time out of your day to join us. That's been really brilliant. So as a reminder, there is a CPD certificate that will be available after the session ends. A short feedback form will also pop up once the session ends. If you do have a few moments just to complete that for us, and we'd really appreciate that. That does help us. And finally, I should just mention, there are a couple of other webinars coming up in the next couple of weeks from XPS. So later on this week, on the 21st of July, we have a webinar, how your brain impacts your authentic self at work, and that's with Dr. Sabina Brennan. So this is a slightly different webinar, so not a pension-focused webinar, but sounds really interesting around how our brain effects our -- the job that we do. So that's on the 21st of July. On the 26th of July, the next week, we have a webinar, the opportunities and challenges of investing in a rising yield environment. So again, really pertinent to today's market conditions and again, some crossover with some of the things we talked about earlier around opportunities in the credit market, opportunities in the insurance market. So for more information on either of those webinars, please visit our website. But that just brings me to say a big thank you to all of you for joining us. I hope you can stay cool for the rest of the day, and goodbye.