Pensions risks transactions have kept pace through lockdown, meaning 2020 is still on track to be a record year for longevity swaps, according to re/insurance broker Willis Towers Watson.
Analysts believe there remains significant appetite for reinsurers to take on new longevity swaps, reflecting the expected decline in business being directed to the bulk annuity market.
This is producing very attractive pricing, and in several cases, schemes have been able to hedge at little or no cost, relative to their technical provisions.
Willis Towers Watson itself has led £10bn of longevity swaps and 13 bulk annuities covering more than £3.1bn of liabilities in 2020, 12 of which took place during lockdown.
The broker noted that the widening of credit spreads has created some exceptional pricing opportunities over the past few months.
For the most part, these opportunities were picked up by schemes where transactions were already partially in-process and could therefore capitalise on this pricing in the short-term.
Similarly, schemes that had transacted previously were also in an advantageous position, in that they could complete a ‘repeat deal’ relatively quickly.
“It was the schemes that were already in the market who were able to take advantage of the strong pricing we have seen,” said Shelly Beard, senior director at Willis Towers Watson.
“Although credit spreads have narrowed again over the last eight weeks, there is still potential for more attractive pricing over the remainder of the year. This is due in part to potential market volatility, but also because insurers are likely to seek out ways to compensate for a fall in new business volumes,” Beard explained.
“This could bring about the return of the ‘end of year sale’ for the first time in several years, whereby prices are cut as the year draws to a close. Schemes who wish to take advantage of that will need to get into the market shortly.”
Willis Towers Watson expects bulk annuity transfer volumes in 2020 to reach around half of 2019 levels, at £20 – £25 billion.
Whilst this falls short of the £30 billion predicted at the beginning of the year, pre-COVID-19, the market will remain busy, and the decline reflects the changes in affordability for some pension schemes.
“Prior to COVID-19, the bulk annuity market was incredibly busy, as demand from pension schemes exceeded supply from insurers,” Beard continued.
“Some schemes were therefore finding it hard to get quotes, creating the potential for pricing to drift upwards over the medium term. This slight reset of the market has restored more balanced market dynamics.”
Ian Aley, Head of Transactions at Willis Towers Watson, also commented: “Naturally there are questions about what COVID-19 means for ongoing longevity swap processes. Whilst the impact on each scheme today can be monitored, the prospects for future improvements in life expectancy are perhaps more uncertain than they ever have been – and it’s going to be many years before we know in full to how COVID-19 and its economic side effects will affect life expectancies.”
“Our clients are taking the view that if they can afford to hedge longevity risk and the pricing looks attractive, now is a good time to proceed, rather than attempting to predict where the market might go in the future.”