The surge in bulk annuities volumes experienced over the first half of 2018, which saw many insurers write almost as much pension scheme volume as in the whole of 2017, is set to continue to increase over the long term, according to actuarial and advisory consultancy Hymans Robertson.
Last month, Hymans Robertson predicted that the record-breaking year would see the bulk annuity market reach transaction volumes of £35 billion, a 100% increase compared with average market volumes over the last four years.
Kieran Mistry, Consulting Actuary at Hymans Robertson, said: “The recent spike in demand from pension schemes for buy-ins and buy-outs is not surprising and one that we have been predicting it for some time. This should not be seen as a temporary blip. In fact, it seems highly likely that demand will continue to increase over the medium to long term. We are on the cusp of a shift in the supply-demand dynamics of the market.”
He added that due the highly attractive pricing currently seen in the market, as well as the volumes already written by insurers and in the pipeline, competitive pricing towards the end of 2018 is not anticipated at the levels the market has historically come to expect.
“Schemes beginning to approach the buy-in and buy-out market at this time of year would have typically looked to transact ahead of the year end, in the hope of benefitting from those year-end opportunities,” Mistry explained.
“This year, the busyness of the market means many of these schemes will instead target a transaction at the start of next year. This means that the pipeline for the start of 2019 will fill up quickly, and we are likely to see a busy start to 2019, echoing the start of 2018.”
In addition to the pension scheme buy-ins and buy-outs are the highly material insurer-to-insurer transactions, such as the transfer of £12 billion Prudential’s existing annuity portfolio to Rothesay Life, and Phoenix taking on Standard Life’s multi-billion pound annuity portfolio.
This is relevant for pension schemes because these ‘back-book’ transactions effectively use up insurer capacity, as insurers taking on these portfolios will often target the very same illiquid assets that could otherwise be used to provide attractive bulk annuity pricing to a pension scheme.
Hymans Robertson added that there are also a large volume of pension scheme buy-ins and buy-outs that are close to transaction, which will buoy this year’s transaction volumes even further.
“Until now, the supply of bulk annuities outpaced demand from pension schemes, and schemes benefited from an abundance of competition and attractive pricing,” continued Mistry. “While the attractive pricing is still there, we are now in a world where insurers are no longer clamouring for every transaction and are able to be more selective.
“Trustees and sponsors will have to be smarter and more patient to get the best outcome for their schemes, and understanding insurance and reinsurance company dynamics and priorities is more important than ever.”
