2019 is expected to surpass what has been a record-breaking year for bulk annuity transactions, with pension scheme buy-ins and buy-outs likely to pass £20 billion by the end of 2018, according to analysts at Hymans Robertson.
Deal volumes in 2018 doubled the previous record set in 2014 and Hymans Robertson said that 100% of Independent Trustees surveyed agreed that they would increase further in 2019.
The consultancy attributed this continued market growth to competitive pricing from insurers and surging pension scheme demand as a result of improved funding levels and further developed risk management.
“2018 has seen a sea change in the bulk annuity market, becoming the first year when demand from pension schemes to complete buy-ins and buy-outs has outstripped supply from insurance companies,” said James Mullins, Head of Risk Transfer at Hymans Robertson.
“Insurers now have the luxury to be more selective about which pension schemes they focus their efforts on and to which they offer their best pricing,” he added. “For the first time in the market’s history a queue for 2019 is already forming and the onus is now with pension schemes to stand out from the crowd.”
Mullins explained that the potential for market volatility from the Brexit deadline in March 2019 could also lead to an extremely busy start to the year for buy-ins and buy-outs, with pension schemes rushing to complete their transaction processes as early as possible.
Hymans Robertson suggested that the increased levels of buy-out deal activity have been driven by an improvement in pension scheme funding levels and it expects that this trend will continue over the next few years.
“Excellent buy-in pricing opportunities remain will remain in 2019,” Mullins continued. “The shift in supply and demand however, means that pension schemes will need to use a more intelligent approach to broking the bulk annuity market, both next year and beyond.
“Before approaching the market, it is now more important than ever for trustees to be well prepared and to have a clear understanding of insurance companies and how they prioritise their efforts. Timing the approach, to factor in the latest activity levels, and not trying to rush through a transaction is also critical.”
Hymans Robertson also suggested that the current regulatory regime encourages companies to reinsure their longevity risk, but noted that only there are only a small number of reinsurers actively seeking this kind of risk, with large amounts of capacity remaining untapped.
The firm estimated that there is potential global capacity to support the full £2.3 trillion of liability, although there is currently limited appetite for longevity de-risking outside of the UK.
However, the capital markets could serve as an additional source of longevity hedging capacity, analysts claimed, which would help to plug any deficit should North American pension plans of insurers suddenly develop an appetite for longevity de-risking.
