Insurance and reinsurance broker Aon is anticipating an active 2018 for the UK bulk annuity market, expecting transactions to reach £30 billion (US$40.3bn) for the first time.
Transaction in 2017 are expected to exceed £10 billion (US$13.4bn) for the fourth consecutive year, in spite of the market failing to see any individual transaction exceeding £1 billion (US$1.3bn) for the first time in five years.
John Baines, a Partner in Aon’s Risk Settlement team, said; “As we move towards 2018, Aon is expecting the re-emergence of the ’mega-deals’, with a very strong pipeline of £1 billion deals already in place, relating to both pension schemes and insurer back-books.
“This increase in market activity has been driven by two factors. First, financial positions of schemes continue to improve, which has resulted in an increased focus on de-risking for both trustees and sponsors. In particular, we have seen an increase in sponsors using bulk annuities to make a clear statement to shareholders that pension risk is under control.”
Baines continued to note that the pricing of bulk annuities is at a nine-year low when compared with other low risk assets, which has been a result of innovation within insurance companies’ investment strategies, increased competition, and a reflection of the most recent longevity trends.
“Given the good pricing available, the time looks to be ripe for pension schemes aiming to acquire a bulk annuity. However, schemes – now more than ever – need to be serious when they approach the market. Schemes need to be able to align and articulate the strategies of all the key stakeholders – the trustees, sponsor and members. Schemes need to be clear about which benefits they are insuring, and of the structure of deal from the outset,” said Baines.
He added that while a speculative approach to the market may have been tolerated in the past, in 2018 companies that take this approach might be disappointed, with insurers now more than ever turning their focus to those most likely to transact.