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Volatility driving pricing disparity in bulk annuity market: Aon

15th May 2020 - Author: Matt Sheehan

Recent volatile market conditions have been driving a much wider range of pricing for pension scheme buy-ins and buy-outs than has been seen over the last decade, according to re/insurance broker Aon.

Despite these uncertainties, Aon still forecasts that 2020 will be another busy year for risk settlement, with pension schemes of all sizes seeking to secure members’ benefits.

Data shows that over £6 billion of bulk annuity transactions have already been completed, of which Aon has acted as lead adviser on around £3 billion.

“Over the last two months, and with financial markets volatile due to the still developing COVID-19 situation, Aon has seen a range in some cases of over 10% on the best to worst pricing on individual transactions – over double what we might expect in a more typical market situation,” said Mike Edwards, partner in the Risk Settlement team at Aon.

“In addition to that, the pricing levels from individual insurers have been highly variable from transaction to transaction.”

Aon believes the wider pricing disparity in the bulk annuity market reflects several factors, including the variety of insurer pricing investment strategies, and particularly the proportion they invest in corporate bonds.

Other factors include the sourcing capability of individual insurers to buy corporate bonds at prevailing yields, given reductions in market liquidity, and the range of views on how much of increases in credit spreads relates to increased risk of defaults.

“Current market conditions may be creating significant differences in pricing between insurers on individual deals, but the best pricing captured is still among some of the most attractive seen in recent years,” Edwards continued.

“With this recent pricing volatility, schemes might question whether they should wait for current uncertainties to lessen before approaching the market. But our experience – including over the last month in which we have still completed around £1 billion of transactions – is that if schemes are ready to transact they are better off being ‘in the market’.

“Volatility is doubled edged – it can lead to very attractive pricing opportunities and it can often be short-lived. It is also important for schemes to work with an adviser who understands which insurers are most relevant for their transaction and then to target their market approach accordingly.”

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