Are we approaching a new age in the bulk annuity market?
14 Aug 2018 - Estimated reading time: 5 minutes
As predicted, 2018 is shaping up to be a record year for bulk annuity volumes, with many insurers writing almost as much pension scheme bulk annuity volume in the first half of 2018 as the entirety of 2017.
|Insurer||First half of 2017||Second half of 2017||First half of 2018|
In addition to the pension scheme buy-ins and buy-outs are the highly material insurer-to-insurer transactions, in particular, £12 billion of Prudential’s existing annuity portfolio transferring to Rothesay Life, and Phoenix taking on Standard Life’s £multi-billion annuity portfolio. This is relevant for pension schemes because they effectively use up insurer capacity. In particular, to deliver a competitive buy-in or buy-out price, an insurance company needs to source illiquid assets that provide a good match for the pension scheme cashflows. When an insurer takes on an existing annuity portfolio from another insurer, they often target the very same illiquid assets that could otherwise be used to provide attractive bulk annuity pricing to a pension scheme.
There is also a large volume of pension scheme buy-ins and buy-outs that are close to transaction, which will further buoy this year’s transaction volumes. As a result, the market is well placed to meet the predicted total volume of £35 billion, which would be more than a 100% increase compared to the market average over the past four years.
What’s driven the increased activity?
This increased activity reflects a steep rise in the number of schemes approaching the market for buy-ins and buy-outs, due to:
- Attractive market pricing. We have seen some of the best pricing ever in the first half of 2018 for pension schemes ready to take advantage. Insurers are getting better and better at sourcing attractive illiquid assets that support competitive pricing.
- Improving funding levels. Strong equity performance and continued financial support from sponsors have improved funding positions for defined benefit schemes, making buy-in and buy-out more affordable.
- Schemes targeting buy-out. Trustees and sponsors are being encouraged by The Pensions Regulator to set formal long term targets and objectives. This is increasing the focus on buy-out as the end game for many schemes, with staged buy-ins over time a common and beneficial approach.
What does this mean for the rest of 2018 and 2019?
Over the last few years, calendar year-ends have brought opportunities for pension schemes in the market for buy-ins and buy-outs:
- December 2015 – Solvency II – insurers and schemes were keen to transact ahead of the implementation of Solvency II on 1 January 2016 when the capital requirements for bulk annuities would increase.
- December 2016 and December 2017 – insurers were keen to transact to meet targets for business volumes at their financial year ends.
- Early 2018 – pricing continues to improve, contrary to other recent years where general pricing cooled off from year end levels.
Given the volume of business written by insurers so far this year, the amount expected to be written in the third quarter of 2018, and the already highly attractive levels of pricing, the end of 2018 might not bring the increased keenness from insurers to transact and the corresponding improvement in pricing we’ve seen in recent years.
Schemes beginning to approach the buy-in and buy-out market at this time of year would have typically looked to transact ahead of the year end, hoping to benefit from those year end opportunities. This year, the busyness of the market means many of these schemes are instead targeting a transaction at the start of next year. This suggests that the pipeline for the start of 2019 will fill up quickly, and we are likely to see a busy start to 2019, echoing the start of 2018.
How can schemes navigate the evolving market?
The recent spike in demand from pension schemes for buy-ins and buy-outs is not surprising; Hymans Robertson and other market commentators have been predicting surging demand for some time. Nor should this be considered a temporary blip. In fact, it seems highly likely that demand will continue to increase over the medium to long term.
We are on the cusp of a shift in the supply-demand dynamics of the market. Until now, the supply of bulk annuities outpaced demand from pension schemes, and schemes benefited from an abundance of competition and attractive pricing. The attractive pricing is still there, but in a world where insurers are no longer clamouring for every pension scheme’s bulk annuity transaction and are able to be more selective, trustees and sponsors will have to be smarter and more patient to get the best outcome for their schemes.
It’s therefore more important than ever for schemes to:
- Understand what each insurer and reinsurer is looking for in a transaction, to get the scheme’s transaction high on their priority lists.
- Run carefully considered broking processes that are well-aligned with insurers’ internal procedures. This reduces the amount of precious resource needed from insurers and allows them to focus their efforts on providing the best price.
- Work collaboratively with insurers and reinsurers to achieve optimal outcomes that meet the scheme’s objectives.
The market is shifting and evolving, presenting both challenges and opportunities for all. Schemes need an advisor who understands insurance and reinsurance company dynamics and priorities inside out and can guide them towards achieving great outcomes and reaching their ultimate goals.