Slower start for bulk annuities in 2016

"Whilst 2015 was another extremely strong year, with transaction volumes comfortably exceeding £10 billion for the second year in a row, the first half of 2016 has been a little quieter."
Our recently released report on the state of play in the bulk annuity market, Barnett Waddingham’s Bulk Annuity Annual Report 2016, examines the latest developments in the market.

This includes the implications of Solvency II, following its introduction at the start of the year, and the immediate fall-out from the EU Referendum result. We consider the impact of these developments for defined benefit (DB) schemes and highlight some important issues for trustees and sponsoring employers looking to transact in the most cost-effective and efficient manner.

Whilst 2015 was another extremely strong year, with transaction volumes comfortably exceeding £10 billion for the second year in a row, the first half of 2016 has been a little quieter with the existing retail annuity books of certain insurers providing competition for the capacity of some of the bulk annuity providers. However, further de-risking remains the clear direction of travel for the majority of schemes as they continue to mature, albeit against a backdrop of challenging financial conditions for pension scheme funding.  

As part of our 2016 report, we sought the views of the insurers themselves on a number of key areas relating to the buy-in and buy-out market and its potential future development*

Some of the main findings from this research are set out below:

There are clearly costs for an insurer in participating in a quotation process which it cannot recoup if either the transaction fails to complete, or it ultimately loses out to another provider. In addition, as the demand from pension schemes increases this can begin to place pressure on the insurer’s finite resources. Therefore, insurers need to assess their appetite for any potential transaction coming to market and their willingness to quote, taking into account other competing opportunities.

We asked the insurers to rate the relative importance of a number of factors in making their assessment of a prospective transaction. Each of these factors effectively represented a positive indicator that the transaction was likely to proceed, and while the insurer would typically look at all the factors to some extent in the round their relative rating is interesting. We look at highest three rated factors by the insurers.

Top three assessment factors:

  • transaction affordability clearly considered
  • engagement of both trustee and employer
  • clear governance structure and decision-making process

The top two factors are probably no great surprise, however they do emphasise the importance of carefully considering the feasibility of the transaction and ensuring all the stakeholders are 'on board' before approaching the market.

From an affordability perspective this includes both the potential funding implications and also any accounting impacts for the employer.  The third factor is interesting and may sometimes not receive as much focus, but the feedback clearly emphasises the advantage of having an appropriate governance structure in place and being able to clearly demonstrate this.

In relation to the number of providers in the market, the majority of the insurers felt that the number of active providers would be broadly similar for the next couple of years, but increasing to around 10 or 11 in five or so years.

We also provided the insurers with a number of important factors which may act as possible barriers to entry for new providers.  The most significant factors identified by the insurers related to an effective compliance approach to the Solvency II regime (including efficient use of the internal model and matching adjustment within this) as well as being able to source suitable return providing assets and having access to sufficient capital.

Unsurprisingly, having a well-resourced and experienced team were also highlighted as being very important factors, and this clearly represents a challenge for any material increase in the number of providers.  Interestingly one of the lesser rated factors was deemed to be band name/awareness indicating a potentially greater focus on more tangible measures.

A material easing of market conditions (such as a rise in in long-term interest rates or strong growth asset performance) was considered by the insurers to be the most significant event which might see a step change in the demand from pension schemes.  Another important factor influencing market demand was expected to be the ability of the insurers to source higher yielding investments to match the liabilities to support enhanced pricing levels, for example through increased asset allocations in growing areas such as infrastructure and equity release.

If you would like to discuss any of the points in the report or discuss what steps can be taken to prepare your scheme for a transaction then please let me know.

* We thank Aviva, JRP Group, Legal & General, Pension Insurance Corporation, Prudential, Rothesay Life and Scottish Widows for their participation.

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Buy-outs and buy-ins report 2016

Read the full report