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The final transaction figures for 2017 recently released by the bulk annuity providers confirmed a fourth consecutive year where total buy-in and buy-out business volumes have exceeded £10bn, with a combined market figure of £12.2bn for the year. The level of demand is only set to increase as pension schemes continue to mature and make progress towards their end-goal.
A general improvement in the funding position for many schemes, coupled with the highly competitive pricing (relative to gilt yields) currently available in the bulk annuity market, provides the platform for a potentially significant increase in demand. Attractive pricing levels have been aided by the insurer’s success in sourcing alternative long-dated assets with higher expected returns allowable under the Solvency II reserving regulations. There has also been increased recognition in re-insurers longevity pricing of the more recent mortality experience which has shown higher than expected mortality rates, feeding through to lower bulk annuity pricing.
For a number of schemes, they may be materially closer to buy-out than they realise, especially if they take into account the outstanding value of any future deficit contributions under their existing recovery plan – taken together with certain other actions, this can go a long way to bridging the gap.
The dynamic supply/demand balance in the market is also influenced by the transfer of any existing annuity back-books between insurers. However, despite Prudential’s recent sale of part of its annuity book to Rothesay Life for £12bn, insurer appetite and competition within the market has held up strongly. While clearly this represents a very significant deal for Rothesay Life to absorb, sale of the entire tranche to a single insurer may well represent a better outcome for pension schemes with potentially less impact across the market as a whole.
"However, despite Prudential’s recent sale of part of its annuity book to Rothesay Life for £12bn, insurer appetite and competition within the market has held up strongly. "
In a world of increasing demand, insurers are able to be more selective in allocating their time and resources. Therefore, approaching the market at the right time, and in the right way, is more important than ever. Positioning the scheme as favourably as possible and demonstrating a high likelihood of transaction can make a clear difference to the level of insurer engagement, and so ultimately the level of pricing that may be achieved.
This requires the necessary planning and preparation, identifying the key steps and objectives, with a realistic timetable to deliver these effectively. For example, this could also include the use of liability management exercises where appropriate to improve the potential affordability of a transaction.
Even if full buy-out may seem some way off, Trustees and sponsoring employers have increasingly been considering the option of a phased buy-in approach which can be used to reduce risk over time, taking advantage of pricing opportunities and providing a degree of protection against the market potentially becoming less favourable in the future.