The pension de-risking market is growing at its fastest pace in years, in part because such activity has become more affordable than at any point in the last decade. We foresee an unusual number of longevity reinsurance deals worth £1 billion–£4 billion that are in the market in 2018. This affordability of pension buy-ins and buyouts is due in part to the solid alignment between growing market demand and the industry’s increasing capacity. It is also aided by the funded status of U.K. pensions, which, on average, were fully funded in the summer of 2018.
Pensions are benefitting from new entrants to the insurance market, including primary insurers and reinsurers. These new participants, including Scottish Widows and Phoenix, are adding additional capital and market capacity. In addition, Aviva has increased its focus on this market, bringing substantial capital and a much larger team. And although overall competition is vibrant, the market is not overly competitive, as demand for de-risking solutions continues to grow.
Two additional factors are keeping prices affordable. The first is the addition of new asset strategies, such as the use of new illiquid asset classes, including the securitization of wind and solar energy. The second is that longevity has been improving at a slower pace than the historic average.
• The current slowdown in longevity improvement is due to several health advances occurring simultaneously between 2000 and 2010 (smoking reduction, stents, statins, etc.), a confluence of improvements that made the pace of longevity gains in subsequent years harder to match.
• But the current, slower pace of longevity improvement is unlikely to persist as there are several possible health advances that could re-accelerate the pace of longevity gains in the years ahead.
The globalisation of pension de-risking, beyond the U.S. and U.K., is happening now. In recent months, there have been two notable pension risk transfers in Germany, together worth more than $5 billion. We expect this type of activity to grow. This progress builds on the development of pension de-risking markets in other countries, such as Canada and the Netherlands. Some of these efforts are being led by multinational companies that have pensions in several countries around the world.
The recent alchemy of rising interest rates and equity prices is unlikely to last. Right now, the average corporate pension fund in the U.K., the U.S. and Canada is at or near full-funding, which represents a marked improvement over the last two years. Leading pension schemes are taking advantage of this favorable environment by locking in gains and transferring risk, with the knowledge that such advantageous markets are always fleeting.
There is risk in waiting. Pensions that decide to keep their risk rather than hedge it—hoping for even lower prices—are maintaining a risky strategy. Managing high-risk market positions requires navigating the volatility of markets, interest rates and currencies, all of which are compounded by longevity risk. Pension risk transfer, by contrast, is an all-weather strategy for managing such risks.
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