The current pricing of insurers’ bulk annuities is highly competitive when compared to gilts and is providing extremely attractive opportunities for schemes looking to remove both financial and longevity risks without impacting their funding position. Today’s annual bulk annuity report from Barnett Waddingham examines which schemes should consider a bulk annuity transaction as well as the current issues affecting the market.
As defined benefit (DB) pension schemes continue to mature while considerable uncertainty persists within financial markets, trustees and employers are actively looking to manage their pension risks. This appetite is demonstrated by the bulk annuity providers completing a record-breaking £20bn of business in 2016, with pension scheme transactions exceeding £10bn for the third consecutive year. 2017 has also shown a strong first half (over £5bn) with increased activity expected towards the end of the year.
As well as discussing the key considerations for trustees and employers in successfully completing a buy-in or buy-out, the report highlights the potential for significantly increased demand over the next few years. It also assesses the value of member transfers, or pension increase exchange exercises, in reducing the ultimate cost of a transaction.
Report highlights include:
- Attractive pensioner pricing has supported the strong appeal for buy-ins across the full range of transaction sizes, with buy-ins accounting for around 80% of the total pension scheme transactions completed in 2016.
- Buy-out demand remains robust, with those schemes which have been well-hedged, and benefiting from favourable overseas equity performance, being well positioned.
- Based on current pricing most schemes with significant unleveraged gilt holdings should be exploring the possibility of a pensioner buy-in.
- Pension scheme demand could be accelerated significantly if market conditions improve – over half of FTSE 350 companies with DB schemes could be 90% buy-out funded in the next 3 years if interest rates rise by 1% p.a. more than expected.
- The large annuity back-books of Prudential and Standard Life (combined value in excess of £50bn), could also provide competition for the insurer supply side of the market in the near future. These factors emphasise the importance for schemes of being well-prepared and positioning themselves favourably to gain the necessary insurer appetite.
- There is an increasing trend of schemes returning to complete follow-on transactions, leveraging off previous experience, track record of completion and insurer relationships.
Gavin Markham, partner at Barnett Waddingham, said: “For trustees and sponsoring employers considering purchasing a buy-in, insurer pricing for pensioners is at historically competitive levels relative to gilts, making it a very attractive de-risking option. At these pricing levels, the case for reducing risk, including the associated longevity risk, can be compelling where a scheme may be able to exchange available low risk assets for a buy-in with no, or even positive, funding impact.
“Solvency II is still in its relative infancy, but insurers now have greater experience of operating within the regime, which together with the continued healthy competition in the market and insurer focus on sourcing alternative assets with higher long-term yields, has helped to support the attractive pricing levels. Being well-prepared and aware of the potential insurance opportunities must be high up the agenda of employers and trustees – especially in a world where scheme demand could increase significantly if market conditions eased, and where providers have the potential distraction of other insurers’ annuity back-books.
“Understanding both the financial and longevity risks facing the scheme is essential in providing the full picture and enabling appropriate de-risking decisions to be made. The role of liability management options to reduce the insurance cost, and possible phasing of buy-in transactions to take advantage of de-risking opportunities, should be considered carefully as part of the schemes overall planning.”