In this video, Martyn Phillips, Partner at Mercer’s Bulk Pensions Insurance Advisory, discusses the state of play in the UK bulk annuity market, covering buy-ins and buyouts. He looks at how the market continues to evolve, with better and more effective ways to transfer pension risk.
This video provides an update on the state of play in the UK bulk annuity market, covering buy-ins and buyouts.
The market continues to evolve, with better and more effective ways to transfer pension risk to insurers emerging.
Over the last 25 years, approximately £80 billion in defined benefit obligations have been transferred to UK insurers, but this will be dwarfed by transaction volumes expected in the next 20 years as it becomes increasingly attractive to complete such transactions.
What has been happening in the bulk annuities market?
Against the challenging backdrop of volatile markets, and inflation and gilt yields at near historic lows — never mind significant developments such as “Freedom and Choice” and the introduction of the new regulatory capital regime for insurers, Solvency II — the bulk annuity market has remained extremely buoyant, with over £12 billion of bulk annuities purchased during 2015 and deals in the pipeline for 2016 and beyond building rapidly.
This demonstrates that the effective and economic transfer of pension risk to insurers is a thriving marketplace that is set to grow.
Contrary to some viewpoints, we see the market providing solutions for schemes of all sizes, with deals ranging in size from as small as £1 million to well in excess of £1 billion, and across all types of transactions, be they pensioner buy-ins or full scheme buyouts. However, overall, from scheme to scheme, we are seeing an increase in variability in pricing between insurers.
As a consequence of Solvency II, insurers are now tending to purchase more longevity reinsurance. This increases the demand for longevity reinsurance and could well mean that we soon see the first examples of schemes exchanging existing longevity swaps for a buy-in.
Despite the prevailing headwind of low-yielding and volatile markets, insurer pricing remains attractive, with aggressive pricing seen for deals involving around £100 million of pensioner liabilities, where insurer pricing remains significantly lower than the cost of backing those same liabilities using gilts.
Overall, the outlook for 2016 and beyond is that the bulk annuity market remains good to go, with existing insurers continuing to commit to the market, plus recent new entrants, such as Scottish Widows and Canada Life, keen to establish themselves within this growing marketplace.
Looking now at deal structures and insurer products, one development of note is the emergence of financial re-engineering of pension scheme liabilities. What do we mean by this? It means creating value for all parties through a coordinated and combined package that allows members to take options such as Pension Increase Exchanges or Enhanced Transfer Values, supported with high-quality personalised financial advice, against an overall background of annuitisation.
We see this kind of joined-up project delivering improved value for individual members, which fits well under “Freedom and Choice”, and can enable overall economic settlement of a scheme’s pension liabilities at well below what was perceived to be the realistic buyout cost.
A high-profile example of pension scheme financial re-engineering was the £3.5 billion buyout completed by Philips at the end of 2015, which brought together Enhanced Transfer Values, a Pension Increase Exchange exercise, Winding Up Lump Sums and bulk annuities. This was a win-win-win. Members benefited from options they wouldn’t otherwise have had. The trustee got the deal it wanted, and the sponsor reduced its costs.
Without doubt, better-quality data leads to improved opportunities to complete a buy-in or a buyout — and most likely on better terms, too. Take medical underwriting, where individual health and lifestyle information is gathered, enabling the insurers to gain a more detailed insight into the life expectancy of each individually underwritten member, enabling the insurer to have more certainty around the longevity risks they are potentially taking on. This allows the insurer to reduce margins for prudence.
Initially, this was deployed by medically underwriting entire pensioner populations for smaller pension schemes. Now we are seeing a growing theme: the use of “top slicing” deal structures, whereby risks concentrated within the small number of the largest liabilities among the pensions in payment are subject to a medically underwritten buy-in.
What we like at Mercer is the additional choice it offers our clients.
Keeping in touch in this fast-evolving and growing marketplace is now demonstrably beneficial for all stakeholders. The range of choice and the commercial environment mean it is easy to pay more than necessary and still not purchase the best product for your scheme.
Read our latest insight paper "Bulk Annuities Market – Evolution Not Revolution".