2020 in contrast has, so far, been dominated by pensioner transactions. In many schemes, these transactions can be done without new funding from the sponsor. Subject to transaction timing and positioning, they are possible without adverse funding impacts.
The greatest impact was made by the Co-op scheme, which placed £2.8bn of pensioner buy-ins across two transactions each with Aviva and PIC, advised by Aon, and the Merchant Navy Officers Pension Scheme, whose £1.6bn buy-in with PIC followed several previous annuity purchases.
Coronavirus Market Impacts
The dramatic market volatility in March put some transactions on hold, partly due to prohibitive trading costs for bonds. However normal trading had returned by May and most stalled transactions subsequently resumed.
Insurers' solvency positions remain strong, with many raising fresh capital this year to give further protection and taking new measures to hedge their financial position – so limiting short-term downsize risk further than before.
Several have disclosed that, while they have seen some limited downgrading of the credit ratings of their bond investments, no defaults have yet occurred.
The insurers have internal teams sourcing assets internally for backing annuities – in some cases the assets relate to their own mortgages or other products. This means they have available assets and spare capital to back new deals: so with a temporary fall-off in multi-billion buyouts, small to midsize schemes have an opportunity to access these.
Indeed the run-rate of new deals remains in line with the 150 written in 2019, partly because the pace of new sub-£100m deals has not slowed in lockdown. It does remain true that each case must pass testing criteria from an insurer before they will commit to pricing work. To enable this, the market commonly uses stream-lined services such as Aon's Pathway to maximise interest and to ensure each case is ready to trade.
The virtual deal
More than ever, the post-lockdown environment has demonstrated the need for rapid decisions in the current very dynamic market, in order to capture the best opportunities for pricing and for a smooth asset transfer.
Recent transactions have been characterised by schemes embracing virtual meetings and new technology, usually arranged with little notice, and establishing clear practical decision-making processes.
While the same is true of the insurer teams, pension schemes have perhaps not had as consistent a reputation for nimbleness before, and this positive drive forward in scheme practices from the outset of lockdown is remarkable, and something we expect to be maintained for the future. Without this, we doubt if some 2020 transactions would have happened.
Market share
Insurers have been releasing half-year results over August. While some final sales information cannot yet be confirmed, three insurers - PIC, Aviva and L&G – dominated volumes with over £3bn placed each. Rothesay Life's volumes were temporarily reduced (to £0.8bn) by the lack of larger full scheme buy-outs, after dominating 2019 with large deals for the Asda, telent and Allied Domecq schemes among others.
We will confirm final positions at the start of September.
Autumn opportunities
Traditionally the market has peaked in the last quarter of the year, as insurers look to attain sales and profit targets. In 2018-2019, the timing of large deals instead drove the market, with some insurers using up their assigned capital for annuities before December.
This year is likely to see a return to a peak of activity in Q4 for some insurers, particularly in light of the spare capital in the market, and the fall in sales volumes for other business lines hampered by lockdown.
Several substantial bulk annuity auctions are reaching conclusions over August-September. We expect this to leave insurers that do not win these auctions keen for transactions in Q4. This suggests strong pricing for cases that fit with their available asset opportunities for backing the annuity. A scheme will need to mobilise quickly now to be ready for this scenario.
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