The bulk annuity market has remained active all throughout lockdown, with insurers’ operating and financial models having shown to be robust by withstanding the recent instability. Over the past few months, the widening of credit spreads created some exceptional pricing opportunities.
For the most part, these opportunities were picked up by schemes where transactions were already partially in-process and could therefore capitalise on this pricing in the short-term. Similarly, schemes that had transacted previously were also in an advantageous position, in that they could complete a ‘repeat deal’ relatively quickly.
Since the beginning of 2020, Willis Towers Watson has led 13 bulk annuities covering more than £3.1bn of liabilities, 12 of which took place during lockdown.
Shelly Beard, senior director at Willis Towers Watson said: “It was the schemes that were already in the market who were able to take advantage of the strong pricing we have seen. Although credit spreads have narrowed again over the last eight weeks, there is still potential for more attractive pricing over the remainder of the year. This is due in part to potential market volatility, but also because insurers are likely to seek out ways to compensate for a fall in new business volumes. This could bring about the return of the ‘end of year sale’ for the first time in several years, whereby prices are cut as the year draws to a close. Schemes who wish to take advantage of that will need to get into the market shortly.”
Willis Towers Watson expects bulk annuity transfer volumes in 2020 to reach around half of 2019 levels, at £20 - £25 billion. Whilst this falls short of the £30 billion predicted at the beginning of the year, pre-COVID-19, the market will remain busy, and the decline reflects the changes in affordability for some pension schemes.
Shelly Beard continued: “Prior to COVID-19, the bulk annuity market was incredibly busy, as demand from pension schemes exceeded supply from insurers. Some schemes were therefore finding it hard to get quotes, creating the potential for pricing to drift upwards over the medium term. This slight reset of the market has restored more balanced market dynamics.”
Longevity Swaps
The longevity swap market has remained busy throughout the year, with a number of transactions close to completing in a market which typically sees only a few transactions each year. Willis Towers Watson predicted that 2020 would be record breaking in terms of the volume of longevity swap transactions, and we still expect this to be the case, with more than £25bn of new longevity swaps expected.
There is significant appetite for reinsurers to take on new longevity swaps, reflecting the expected decline in business being directed to the bulk annuity market. This is producing very attractive pricing, and in several cases, schemes have been able to hedge at little or no cost, relative to their technical provisions.
Commenting on the longevity swap market, Ian Aley, Head of Transactions at Willis Towers Watson, said: “Naturally there are questions about what COVID-19 means for ongoing longevity swap processes. Whilst the impact on each scheme today can be monitored, the prospects for future improvements in life expectancy are perhaps more uncertain than they ever have been – and it’s going to be many years before we know in full to how COVID-19 and its economic side effects will affect life expectancies. Our clients are taking the view that if they can afford to hedge longevity risk and the pricing looks attractive, now is a good time to proceed, rather than attempting to predict where the market might go in the future.”
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