At First, Brexit Slowed the Pace of Pension De-Risking: Transaction volume dropped significantly in H2 2016 following the Brexit vote and the resulting market volatility. From a risk and governance perspective, pension funds needed to focus on market exposures and on funding their plans. Pensions that had foreign equities, U.K. gilts and unhedged currency exposure were better off, as they were able to manage through volatility and continue on their de-risking path. Those with sterling-denominated risky assets were hardest hit.
But the De-Risking Market Has Been Rebounding in 2017: Market volatility has subsided in recent months and many companies that previously prepared for pension de-risking are now moving forward with their plans. Significant de-risking activity is expected in the U.K., where 25% of pensions are more than 100% funded, even after Brexit (only 15% were in surplus at the end of August 2016, according to the Pension Protection Fund’s 7800 index). In 2017 and beyond, we expect more growth, more innovation and the continued adoption of U.K. de-risking techniques in other countries.
U.K. Pension De-Risking Is the ‘New Normal’: Moves to de-risk pensions have become the expectation among shareholders and key stakeholders in most U.K. companies. In every industry peer group and throughout the FTSE 250, companies are choosing to shed longevity risk embedded in their pensions through buy-ins, buy-outs and longevity hedging.
U.K. Longevity Gains Have Slowed: Predictions for improvements in U.K. longevity have slowed dramatically over the past five years for most (but not all) segments of the population, resulting in lower prices for hedging longevity risk. Differences by socio-economic groups are more significant than before, making insured solutions that are tailored for specific populations all the more important.
Longevity Risk Transfer Prices Are Historically Low: Due to lower-than-expected longevity improvements, the cost of transferring longevity risk has fallen. The projection models used for pricing assume that lower levels of improvements will persist in the near term. Because of this, the present environment represents an opportunity for pensions to transfer longevity risk using these assumptions that are more favorable than in the past. Longevity improvement projection models in use in the market are not a crystal ball: There remains a great deal of uncertainty with regard to future longevity improvements.
‘Waiting’ Involves Risk: Pensions that decide to keep their risk rather than hedge it—hoping for even lower costs—are maintaining a risky strategy. Pension schemes that maintain a high-risk position will need to manage the continuing volatility of markets, interest rates and currency fluctuations, which are compounded by longevity risk. Pension risk transfer is an all-weather strategy for managing such risks.
We Expect More Longevity-Only Agreements: After a lull in 2016, we’re seeing an increasing number of transactions where pension funds are hedging their longevity exposure while keeping their asset risk. The market has developed a range of solutions for longevity hedging. These different structures ensure that every large pension scheme can find a suitable longevity hedging solution that addresses their specific trustee concerns. This flexibility combined with lower prices and increasing simplification and standardization in the transactions will lead to continued growth in this market segment.
|
