In its latest Bulk Annuity Market Update, Scottish Widows reports that although the volume of transactions in 2016 was lower than the two previous years, the number of schemes that are ‘in the market’ having previously confirmed feasibility or that are due to come to market soon would suggest an increase in 2017.
Volumes in the first half of 2016 were significantly lower, due largely to the introduction of Solvency II which drove many transactions to complete by the end of 2015, leaving the start of 2016 with a comparatively small pipeline. Despite market volatility driven by the outcome of the EU Referendum and subsequent events, however, activity picked up significantly in the second half of the year, which saw around double the volumes of the first half.
The start of 2017 has been characterised by rising UK inflation expectations, a fall out from the weaker pound as the rising costs of imports start to be felt. Rising inflation and a weaker pound have a number of potential implications for the bulk annuities market. These include:
Schemes with caps and 0% floors to inflation linked benefits and who are not perfectly hedged (i.e. the majority) will see a pricing benefit as the cost of the floor reduces.
Schemes with overseas parents may take an opportunity to cash in on the weaker pound and bolster funding levels, creating de-risking opportunities.
Despite the uncertain economic outlook for the UK, 2016 showed that pension scheme trustees and employers can still achieve their de-risking objectives in the face of market volatility, and Scottish Widows sees opportunities for competitive bulk annuity pricing.
Emma Watkins, Director of Bulk Annuities at Scottish Widows, says: "It was pleasing to see the resilience of the bulk annuity market in 2016 in the face of significant legislative change and market volatility. The start of 2017 continues to see market fluctuations and while we expect this to bring challenges, it also provides opportunities for well-prepared pension schemes ready to act quickly when de-risking opportunities arise.”
|
