Editorial: Two giants are congratulating each other on a massive deal. Pension liabilities worth £6bn are to change hands between Dutch insurer Aegon's UK subsidiary and Rothesay Life, the bulk annuity specialist set up 10 years ago.
Rothesay has been expanding its business steadily, reinsuring £1.2bn of backbooks from Zurich UK Life last year. This was preceded by the purchase of MetLife in 2014 and Paternoster five years ago, including of course their annuity books.
Pension scheme trustees and employers hearing the news of the £6bn deal probably gulped in alarm. The writing is on the wall: a new era of insurer-to-insurer transactions is dawning. That often-invoked 'journey' on which a pension scheme derisks ever more until it reaches the employer nirvana of buyout – or at the very least its pre-stage, buy-in – might have just moved further away.
The extra capital required from insurers to hold annuities under Solvency II will incentivise those whose core business no longer includes annuities to shed their backbooks sooner rather than later.
Competition from insurers swamping the market with annuity backbooks is the last thing an employer aiming for a risk transaction will be hoping for.
Of course the market has got bigger as more insurers have come on board. But if large chunks of capacity disappear overnight, this could impact the chance of a scheme finding a counterparty willing to take on its liabilities.
Illustration by Ben Jennings
Not all insurers active in the risk transfer space serve every area of the market, certainly, and some focus on smaller schemes and deals. But larger insurance companies might well prefer a deal with another insurer – which is experienced in transacting annuities fast and smoothly and has clean data – over dealing with an inexperienced set of employers and trustees, underwriting perhaps uncertain liabilities.
The good news for sponsors is the market is evolving and innovating to accommodate even those schemes that could not have dreamed of a transaction a few years ago. From accelerated buy-ins to consumer price index switching, many things are possible nowadays.
The pension risk transfer market will remain an interesting one to watch; as defined benefit schemes mature its importance will only grow.
