The pension overhaul in the Budget 2014 could lead buyouts to become more affordable for pension schemes, according to the JLT Annual Buyout Market Watch Report 2014.
Although at-retirement planning was the most affected, the Budget is having both direct and indirect consequences for the bulk annuity market:
• A number of bulk annuity providers that currently write significant volumes of individual annuities are redistributing capital towards their bulk annuity businesses as the former contracts. As capacity in the bulk annuity market increases, we are seeing downward pressure on pricing, as well as speculation over potential new entrants to the bulk annuity market.
• Members of defined benefit schemes may also want flexibility at retirement. If the Government doesn’t enact legislation to prevent transfers from private sector defined benefit schemes into defined contribution arrangements, more members could transfer out, improving schemes’ funding levels. This will consequently make buyouts more affordable.
• The new £30,000 threshold for trivial commutations should ultimately reduce the number of smaller liabilities within a scheme and the costs linked to them, leading to greater affordability of bulk annuity purchases.
This is good news for the buyout market and supports predictions that 2014 will be a buoyant year, with bulk annuity volumes potentially exceeding £10bn.
Q1 2014 has already seen the two largest deals announced to date: a combined £3.6bn buy-in for the ICI Pension Fund and a £5.0bn longevity swap to cover liabilities for the Aviva Staff Pension Scheme. Bulk annuity deals announced over Q1 2014 account for over £3.9bn of liabilities (even before release of official totals). This represents over 50% of the 2013 total and over 75% of annual volumes for each of the preceding three years: a convincing start to the year.
The buyout market – 2013 highlights
The JLT Report found that 2013 proved to be a strong year for the pension insurance market, with momentum building over the period and continuing into Q1 2014.
The total value of pension de-risking deals reached £16.35bn in 2013, with circa 200 bulk annuity deals for a total value of £7.45bn, and five longevity swaps for a combined value of £8.9bn.
Record-breaking 2013 trades included a £1.5bn buyout for EMI (written by PIC) and a £3.2bn longevity swap for BAE Systems (written by L&G).
Medically underwritten bulk annuities
During 2013 more than a dozen underwritten buy-ins were written (giving more than 20 to date), with insurers reporting a strong pipeline of new deals for 2014. Highlights included the first whole of market underwritten buy-in for British Arab Commercial Bank and the largest underwritten buy-in reported to end March 2014: a £33m transaction for an unnamed construction firm, both advised by JLT.
As all parties become comfortable with the concept of medical underwriting, we expect this type of buy-in to become the norm for small to medium sized schemes, especially in light of MetLife’s exit from the market, which has limited the options for obtaining non-underwritten quotations for smaller transactions. Although the majority of transactions to date have been for smaller schemes, and this trend is expected to continue, larger schemes are also able to benefit from underwriting, e.g. by underwriting solely the highest individual liabilities.
Martyn Phillips, Director, Head of Buyouts, JLT Employee Benefits, comments: “The market for pension de-risking solutions saw a strong 2013, with record-breaking transactions and innovative product development contributing to total business volumes in excess of £16bn. So far, the momentum has been carried forward to Q1 2014.
“Trustees and sponsors are increasingly aware of the risks and uncertainties associated with defined benefit pension scheme liabilities and continue to see the economic value of those liabilities as the true price that must be paid. Insurers remain keen to transact and are reporting a healthy pipeline for 2014.
“While the Budget 2014 is expected to reduce volumes of individual annuities written in the future, the bulk annuity market is likely to be a beneficiary and this will contribute to improving buyout affordability for schemes.
“We believe the whole of market broking process that we have developed for completing underwritten buy-in transactions will revolutionise the market and is an important step for schemes looking to de-risk in the most cost-effective way as trustees will only get the most competitive price by reviewing multiple quotations.”
|
