The recent EU referendum result (Brexit) has caused plenty of volatility in the financial markets. However, has this result affected the UK bulk annuity market?
In particular, how does it affect trustees and sponsoring employers of defined benefit pension schemes who are considering a buy-out or buy-in?
"It is important that trustees and employers who are considering buy-outs and buy-ins are committed and ready to transact quickly when pricing becomes affordable."
The good news is that the bulk annuity insurers are still quoting, following the referendum result. It is true that schemes may find it difficult to obtain many quotes for small transactions. However, this was the case before the referendum and is partly due to the large demand for quotes from schemes.
Volatile affordability levels
Following the referendum, insurer pricing has increased sharply* largely due to changes in market conditions. This volatility in financial markets may continue as the political and economic effects of the referendum result become clear. This will feed through to pricing from insurers as well as the value of assets held by schemes.
As this volatility could continue for months and possibly years while the Brexit negotiations continue, it is important that trustees and employers who are considering buy-outs and buy-ins are committed and ready to transact quickly when pricing becomes affordable.
As an example, insuring pensioner members by selling gilts to fund the premium is a popular option for schemes in this market. Immediately after the referendum result, changes in market conditions meant this option potentially looked attractive as gilt prices increased by more than pricing from some insurers. However, this was only a short window - in the following weeks, conditions changed and this option has become less appealing.
For overseas companies who support UK schemes, the falls in the value of sterling following the referendum result may have helped to make possible insurance transactions more attractive. However, currencies may also be volatile so it is important for such employers to be ready to take advantage of any potential opportunities.
In order to be ready to take advantage of pricing opportunities, preparation for buy-out or buy-in transactions is key. This includes setting up the documentation and data needed to request quotes and ensuring that trustees and the sponsoring employer understand the process and what the impact of the transaction would be.
Monitoring pricing is very important where a transaction might be affordable at some point, and we can help with this through our 'live' Illuminate tool which can track the funding level or indicative insurer pricing. Alternatively, it may be possible to select a preferred insurer and agree terms with them. The insurer would then track pricing and asset values until a suitable pricing trigger is reached.
* Based on Barnett Waddingham’s indicative pricing model, using pricing information from several of the major insurers in the market
Joanna Paisley contributed to the writing of this blog post.