Bulk annuity growth could tackle competition gap

Last year was a record year for derisking with over £15bn of longevity risk transferred, according to consultancy LCP. The bulk annuity market grew to around £8bn in 2013 from approximately £5bn in 2012.

This growth brought the prospect of increased competition to the derisking sector, which last year faced concerns that a lack of competition would lead to flat prices

Five large schemes completed buy-ins or buyouts in 2013, which will fuel further growth in the area, said Emma Watkins, partner at consultant LCP.

“We predict that [2014] will be the first year pension fund demand outweighs insurer supply,” she said.

At the Financial Times UK Leadership of Pensions Summit last year, Stephen Nichols, chief executive of The Pensions Trust, raised concerns that a lack of competition in the derisking market could limit value for schemes even in the face of rising gilt yields.

“[Insurance companies] can feel the market is too competitive and doesn’t have the profit levels to justify the expense,” said Charlie Finch, another partner at LCP. 

But growing demand could encourage insurance companies to enter the market and increased competition could provide better value for schemes looking to derisking. 

Medical underwriting

Some schemes are using medically underwritten annuities to seek further savings, but many insurers will not cover them, said Finch.

Schemes looking at procuring these kind of products may end up paying more if their members are perceived as having more longevity risk.

“Poor health means cheaper buyout for the scheme, but it can be more expensive if you don’t know the health of your members in advance,” said Marian Elliott, director at Spence and Partners. “But generally it is a good idea to consider.”

Longevity swaps are also increasingly popular as they allow schemes to insure against life expectancy risk.

Swaps may be seen as the preserve of large schemes due to the high minimum values, but can be useful in allowing schemes to keep the freedom to invest, said Elliott.

Andrew Ward, principal in consultancy Mercer’s financial strategy group, in last week’s issue questioned the mass drive towards buy-ins and buyouts, pointing to the constraints it puts on scheme investment strategies.

“Pensioner liabilities are the least risky, therefore this may not be the best place to focus risk management efforts,” said Ward.