The UK’s bulk annuity market is expected to grow strongly this year with more than £15bn worth of deals over the course of 2018.
What is bulk annuity?
The traditional policy offered by large UK insurers. Pension schemes pay a premium and in exchange the insurer writes an annuity that pays the retirement income of a large chunk of a scheme's pensioners who have already retired.
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.
Secondly, the pricing of bulk annuities compared to other low risk assets is at a nine-year low. This has been driven by increasing innovation within insurers’ investment strategies, greater competition, and a reflection of the latest longevity trends, which show life expectancy expectations are lower than previously predicted and which are now largely factored into reinsurance pricing.
Willis Towers Watson (WLTW) said that longevity hedging pricing is now partially reflecting the higher mortality rates of recent years, with over £10bn of liabilities predicted to be hedged over the course of 2018. WLTW also highlight how pension schemes investing in a buy-in are able to make significant gains relative to investing in gilts while also managing longevity risk.
In addition, following Phoenix Life entering the market last year, it is expected that there will be at least one new entrant over 2018, while a return to large buyouts is also predicted.
The market is expected to be busy throughout 2018. The increased level of activity means that some schemes might need to be patient, waiting for prime insurer appetite and financial conditions before they look to de-risk.