The pension de-risking market is growing at its fastest pace in years, in part because such activity has become more affordable than at any point in the last decade, according to the Head of Longevity Risk Transfer at Prudential Financial Amy Kessler.
Providing an outlook for the longevity reinsurance market over the next 12 months Kessler foresees an unusual number of deals worth £1 billion to £4 billion that are in the market in 2018.
This affordability of pension buy-ins and buyouts is due in part to the solid alignment between growing market demand and the industry’s increasing capacity, says Kessler.
It is also aided by the funded status of U.K pensions, which, on average, were fully funded in the summer of 2018.
Additionally, pensions are benefiting from new entrants to the insurance market, including primary insurers and reinsurers.
These new participants, including Scottish Widows and Phoenix, are adding additional capital and market capacity, according to Kessler.
In addition, Aviva has increased its focus on this market, bringing substantial capital and a much larger team. And although overall competition is vibrant, the market is not overly competitive, as demand for de-risking solutions continues to grow.
Two additional factors are keeping prices affordable, says Kessler. The first is the addition of new asset strategies, such as the use of new illiquid asset classes, including the securitisation of wind and solar energy. The second is that longevity has been improving at a slower pace than the historic average.
Beyond the U.S and UK, there have been two notable pension risk transfers in Germany, together worth more than $5 billion. Kessler expects this type of activity to grow.
This progress builds on the development of pension de-risking markets in other countries, such as Canada and the Netherlands. Some of these efforts are being led by multinational companies that have pensions in several countries around the world.
“The recent alchemy of rising interest rates and equity prices is unlikely to last. Right now, the average corporate pension fund in the U.K., the U.S. and Canada is at or near full-funding, which represents a marked improvement over the last two years,” adds Kessler.
“Leading pension schemes are taking advantage of this favourable environment by locking in gains and transferring risk, with the knowledge that such advantageous markets are always fleeting.”