Mercer advises sponsors of defined benefit plans to start preparing for any potential de-risking transactions as soon as possible, with 2018 expected to be a very active year for the bulk annuity and longevity swap market.
According to consultancy Mercer, 2018 is poised to become the most active year ever for de-risking defined benefit plans in the UK. However, with market conditions favourable for pension risk transfer activity, Mercer warns that insurer and reinsurer capacity will be tested in the months ahead, and calls for those looking at completing a transaction to act sooner rather than later to avoid missing out.
Andrew Ward, Head of Risk Transfer Consulting, Mercer, said; “To maximise insurer engagement and drive competitive pricing in 2018, schemes should ensure that they provide a clear rationale for the transaction with clean data, aligned stakeholders and a well thought through governance structure.
“It should also be borne in mind that this is increasingly a global marketplace and reinsurers, and increasingly some insurers, now operate internationally. Competition for reinsurer capacity is now also well-established from pension plans in North America.”
The volume of global annuity purchase ranged from roughly £19 billion (US$26.3bn) to £22 billion (US$31bn) over 2014 to 2016, peaking at nearly £30 billion (US$41.6bn) in 2017, says Mercer.
However, Ward explains how the volume of global annuity purchase in 2018 might well be higher still.
“It is quite possible that upwards of £50BN of global risk transfer activity will take place this year, once longevity swaps and member options programmes are also taken into account,” said Ward.
The firm also discusses how the UK is on track for the biggest year on record for annuity transactions, but warns that the high volume of expected transactions means some deals could run over into 2019.
“A combination of materially increased demand from pension plans, recent new entrants to the insurance market, along with increased appetite from existing insurers, could boost volumes significantly,” said David Ellis, UK Leader, Bulk Pensions Insurance Advisory.
Continuing to warn that “there is a potential for pension schemes to be pushed down the queue behind other insurers also seeking to transfer their legacy annuity obligations to bulk annuity insurers.”
