Comprehensive analysis of the buy-in market - August 2018
Buy-in monitoring service
16 Aug 2018 - Estimated reading time: 5 minutes
In this edition of our buy-in monitoring service, we share our usual pricing analysis as well as providing an insight into the latest buy-in activity and how we anticipate this will develop as the year progresses. This quarter's headlines include:
Pensioner buy-in pricing improving
Buy-in pricing continued to improve over the second quarter of 2018, with prices in many cases being 5-10% lower than the value of the equivalent gilt liabilities. See our “Buy-in pricing” section for more details.
2018 set to be mammoth year for bulk annuity transactions
As predicted, 2018 is shaping up to be a record year for bulk annuity volumes, with many insurers writing almost as much pension scheme business in the first half of this year as in the entirety of 2017. Attractive pricing and improvements in pension scheme funding levels are creating a perfect storm which is leading to high levels of activity. This is set to continue into 2019.
Well prepared and informed schemes benefit as insurers manage large volumes
The surge in demand from pension schemes provides both opportunities and new challenges for insurers. Insurers are having to carefully manage their own resources and will not be able to provide their best pricing on every transaction. Well prepared schemes with a clear strategy, straightforward approach and realistic target price are likely to be favoured by insurers.
For some years insurers have turned away or minimised effort in responding to speculative quotation requests. What we are now seeing is the start of the next step change in the supply-demand dynamics. A phase where insurers are able to deliver the attractive pricing required by schemes, but are limited in volume by the investment opportunities they can source. Understanding insurers’ investment processes and what they are looking for in a transaction will allow trustees to get to the top of insurer lists and achieve better outcomes from their transactions. See our blog on this topic here.
Regulator considers increased capital requirements for some insurers
The Prudential Regulation Authority (“PRA”) is consulting on proposed changes to the regulations on insurers’ investments in equity release mortgages (ERMs). ERMs are a form of long term borrowing against property which is used by some insurers to back some of their bulk annuity business. The recommendations would further strengthen the insurance regime and require insurers investing in ERMs to hold more capital in respect of these assets to protect against downside risks.
Any changes could be implemented as soon as the end of 2018 and will have differing impacts on the solvency positions and pricing of insurers depending on their allocation to ERM investments. Schemes will need to carefully assess the impact of these changes when approaching the insurance market and incorporate this in decision making if looking to complete a transaction during 2018. See our market update on this topic here.