Average size increases from £114 million in 2010 to £262 million in 2015
Number of transactions steady at between 150 and 200 a year
UK bulk annuity sales in 2015 reached £12.3bn – the second largest year on record
Mercer’s analysis also shows that the UK market in pension buy-ins and buyouts continues to show resilience to market volatility with the number of transactions holding steady at broadly 150 to 200 in each of the last six years. Moreover, aggregate annual premiums paid in respect of smaller transactions (up to £50m each in size) and medium-sized transactions (between £50m and £500m) have stayed at the same levels from year to year, at around £1.5bn and £4bn, respectively. While the size of the market overall has varied from year to year, most of this variation has come from the larger deals, above £500m each.
“We have adjusted our analysis to exclude smaller transactions below £50m and a handful of much larger transactions, to avoid distorting the statistics, but an increase of over two times highlights the stunning growth in the average size of transactions in the core part of the market,” said David Ellis, UK Leader, Mercer's Bulk Pensions Insurance Advisory team. “It’s also interesting to see the UK bulk annuity market’s resilience to the recent falls in yields. Each year, despite varying financial conditions, broadly 150 to 200 sponsoring employers, trustees and their advisers conclude that a buy-in or buyout is the best way to manage at least some of their defined benefit pension obligations in the UK. The decision to purchase annuities costing several hundred million pounds is always material and yet the trend for larger plans to purchase bulk annuities evidences the suitability and credibility of buy-ins and buyouts for managing, and in many cases finally resolving, defined benefit pension risk.”
Mercer also notes that 2015 is the second largest year on record in the UK pension buy-in and buyout market, with pension plans transferring economic responsibility for £12.3bn of defined benefit pension obligations to insurers. The largest year on record is 2014 when £13.2bn of UK pension obligations was transferred to insurers. Over the last ten years, premiums for buy-in and buyouts totalling £64bn have been paid to UK insurers.
Excluding the two largest pension scheme transactions in 2015 (Philips (£2.4bn) and Civil Aviation Authority (£1.6bn)) from the analysis results in £8.3bn of premiums, which is still larger than the £8bn of premiums paid by pension plans in 2008, the third largest year on record. This further demonstrates that the market has been showing genuine growth across all ranges of deal size. Solvency II heralded a new regulatory framework for insurers across the EU with effect from 1 January 2016, with risk management and policyholder protection at its heart. This bought new challenges and put pressure on insurers and transactions in the first part of the year, but we are starting to see the pace of activity picking up again, and we expect to see continued growth and innovation in this sector for years to come.
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