Aon has published its ‘Risk Settlement Market 2018’ report, looking back at what drove the market in 2017 and highlighting the top trends expected for the remainder of this year. |
After a slow start, 2017 brought over £18 billion of risk transferred to bulk annuity and longevity swap providers and an improvement by over 10% of buyout positions for many pension schemes.
Martin Bird, senior partner and head of risk settlement at Aon, said: “I am confident that 2018 will also be a good year for pension de-risking, with improved pension scheme funding levels and better insurer pricing set to make settlement more affordable than ever. The bulk annuity market is set for a record year with transactions potentially reaching £30 billion and we expect a number of full scheme buyouts to enter the market as well as there being a continued flow of pensioner buy-in deals.
“In addition, longevity reinsurance pricing has returned to more attractive levels following the period of dislocation during 2016 and early 2017 and we are already seeing schemes re-entering the market to purchase protection against this risk.”
Bulk annuity market
2017 was a vibrant year for the bulk annuity market with £12.3 billion of bulk annuity transactions. Insurers had already updated their business models to adjust to the requirements under Solvency II and were ready to engage in risk settlement transactions with company pension schemes.
However, at the same time and in order to avoid a shortage of available resource, insurers are increasingly selective before agreeing to quote - and are seeking demonstrable commitment to transact. Education and preparation are crucial if schemes are to secure the most competitive pricing for their liabilities, particularly in the busy market expected for 2018.
John Baines, partner at Aon, said: “We saw a large number of competitive auctions in 2017, with many providers showing their desire to do business with schemes with different risk profiles, with either pensioner-only deals or full scheme transactions.
“Despite a year of record pricing, there were no transactions over £1bn. In part, this reflected the trend towards securing benefits in tranches – either from repeat buyers, who had already secured much of their pensioner liabilities and were simply ‘topping up’, or from schemes taking a more gradual approach to integrating annuities into funding and investment strategies.”
The more stable regulatory environment, the current competitive market as well as governments encouraging to invest in socially beneficial infrastructure, has meant that insurers are increasingly moving away from the traditional approach of investing in corporate bonds to find alternative higher-yielding assets which help them support better pricing.
Mike Edwards, partner at Aon, added: “This innovation in sourcing alternative assets is key to the annuity market’s development, as the level of issuance of listed credit (the traditional asset class for insurers) has been volatile and as credit spreads have reduced in recent years.
“The success of insurers in this area has been a major factor that has allowed them to offer the very attractive pricing. We believe that these capabilities will be increasingly critical in the future if the market is to cope with the increased demand that we are anticipating.”
Attractive bulk annuity deals for schemes of all sizes
Smaller schemes are also increasingly gaining opportunities to obtain competitive quotes from insurers - but to achieve maximum engagement from them, smaller schemes need to provide evidence that they are well prepared to complete a transaction.
Tiziana Perrella, principal consultant at Aon, said: “Given that smaller schemes have higher levels of concentration risk, medical underwriting is particularly relevant to them. Currently, it is still possible to take advantage of potential savings from underwriting by following a model where underwriting is carried out after a transaction completes, and a proportion of the savings is rebated to the scheme.
“Another option schemes might consider is whether to go for a buyout or not. Buyout pricing may look particularly attractive for smaller schemes once the ongoing costs of keeping the scheme running are taken into account, as these can be proportionately much greater than for bigger schemes.”
Phased buy-ins becoming more popular
Schemes are increasingly putting in place a de-risking framework to develop a phased approach to insurance within their existing investment strategy.
Mike Edwards at Aon added: “In an increasingly busy market, schemes that have already gone through a transaction are more likely to get the best deals. Insurers have greater certainty that they will transact, and scheme stakeholders will be sufficiently experienced and nimble to seek and react to opportunities as soon as they arise.”
Longevity risk protection
Martin Bird added: "We expect a busy year in the longevity markets during 2018 with schemes and sponsors continuing to explore both sizing and structuring of longevity deals. We have seen a period of significant change, as the market has reacted to the recent higher rates of mortality. It is no longer seriously disputed that we have entered a phase of low national mortality improvement.
Longevity insurers and reinsurers were initially – and understandably – reluctant to recognise this in their pricing. It led to a dislocation in market pricing during 2016 and early 2017, with pricing materially lagging best estimates. However, this has now changed and reinsurance pricing is again looking attractive to pension schemes.
"Even so, longevity swap activity by UK pension schemes picked up markedly towards the end of 2017, with a number of completed transactions ranging from £300m to £3.4bn in size. With longevity risk hedged for a total of £6.4bn of liabilities during the year (based on deals announced), this was still an almost threefold increase on 2016.
Additional highlights include:
• Around one-third of FTSE100 companies have now implemented a transaction to tackle longevity risk • Around 25% of Aon’s clients now see themselves as either ready, or close to being ready, to insure their pension scheme liabilities via a longevity swap or a bulk annuity transaction • Over 66% of schemes looking to buyout are planning to secure liabilities when pricing opportunities arise • A threefold increase on longevity swaps from 2017, with longevity risk hedged for a total of £6.4bn of liabilities. • PIC and L&G continued to lead market share in 2017, writing a wide range of transaction types and sizes. However, Aviva’s growth plans were also evident, with their business rising dramatically from £0.9bn in 2016 to over £2bn, and a busy start to 2018 suggesting the group will increase volumes further
The Risk Settlement Market 2018 review can be found here
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