With the market predicted to remain busy, a new regulatory regime, changing mortality, and shifting scheme and insurer demands are set to define another bumper year for longevity hedging and bulk annuities.
Four factors are set to determine what schemes need to consider as they weigh up their de-risking options for the year ahead, according to Willis Towers Watson’s 2020 de-risking report. 2019 was another record-breaking year in the longevity de-risking markets, with bulk annuity volumes of £41 billion far exceeding predictions, and 2020 is set to remain busy.
1. Continuation of busy market conditions
The forecast total volume of bulk annuity business in 2020, at £30 billion, would not break the record set last year, as fewer multibillion transactions are anticipated. The number of smaller deals taking place is set to increase, meaning the market will continue to be very busy.
The first half of the year will be particularly active, reflecting pent up market demand from schemes unable to transact by the end of 2019. Scheme funding levels have trended upwards due to positive asset returns alongside longevity gains, enabling schemes to de-risk earlier than expected.
2. A record year for longevity swaps
2020 will bring a record high level of activity for the longevity swap market, as it is predicted to exceed volumes of £25 billion, with transactions heavily weighted towards white collar schemes.
Opportunities for blue collar schemes will arise throughout the year as the reinsurers who have already won business seek to diversify and the others will target schemes that better suit their preferred member demographics.
3. Impact on insurers
The Pension Schemes Bill imposes a requirement on trustee boards to establish a long-term funding objective. This will lead to an increased focus of longevity risk management through bulk annuities and longevity swaps, particularly by small and medium size schemes, as more schemes firm up their targets and journey plan.
More schemes will transfer their exposure to insurers as a means of risk reduction or to settle liabilities, and trustees and corporate sponsors will need to work closely with advisers to decide on the appropriate longevity hedging solution.
Operational resources at insurers will drive capacity, forcing insurers to remain selective and demand a clear transaction plan. The most prepared schemes will therefore get the best market outcomes. Schemes will in turn consider ESG issues in their insurer selection.
4. Uptick in commercial consolidation
Twelve months on from the closure of the consultation on the framework for authorising and regulating commercial consolidators, the Government has yet to settle on the regulatory regime.
The delayed response has given market participants time to consider commercial consolidation, and this combined with clearer regulatory developments are expected to kick-start market activity in 2020.
Commenting on the trends, Shelly Beard, Senior Director, said “The number of mega deals completed through 2019 shouldn’t be repeated in 2020, but there is certainly a lot of demand for deals across the market.
“The changes in pricing over the past few years do show that the importance of choosing the right time to complete a transaction rather than simply leaving it to chance. Knowing your target price, retaining price discipline and flexibility are all key to achieving the best deal possible in this new market environment.”
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