Bulk annuity transfers to pass £15bn in 2018

At an expected £12bn, 2017 is thought to have seen insurance deal volumes break £10bn for the fourth consecutive year, with the schemes of Pearson, Smiths Industries, and the Former Registered Dock Workers Pension Fund all transacting on buy-ins.

LCP’s derisking report showed that slowing life expectancy improvements have helped funding levels improve by nearly 10 percentage points in the FTSE 100 since the EU referendum. One in five blue chip employers is now 80 per cent funded or better, relative to the cost of a full buyout.

I wouldn’t be tempted into a transaction on a ‘buy now because stocks might not last’ basis

Mark Ashworth, Law Debenture Pension Trustees

With finance directors said to be fed up of pumping money into schemes only to see deficits widen, LCP now expects demand for bulk annuity deals to jump by around 50 per cent in 2018.

“They should certainly be looking at what their end game plan is,” said Charlie Finch, a partner at LCP and author of the report. He expected demand to consistently be above £15bn from 2018 onwards, establishing a "new normal" in the market.

Pricing is attractive

With buy-ins consistently cheaper to purchase than the gilts they are usually exchanged for since the start of 2016, Finch said even schemes that are unable to afford a full buyout are now looking at buying in tranches of their liabilities.

The ICI Pension Fund has been an eye-catching example of this strategy, completing 11 buy-ins worth more than £8bn across a panel of insurers as of October 2016.

“It takes all schemes time to get to a position where they can fully insure, and a buy-in is a great way to get on that ladder,” said Finch, adding that the buy-in normally has no cash cost to the employer.

Market is watching Pru exit

If demand for bulk annuity deals is indeed set to spike during 2018, consultants are happy for the moment that the insurance market has the capacity to deal with it.

Phoenix Life’s entry into the market in 2017 brings the total number of participants to eight, just down from peaks of nine in 2012 and 2015.

Only six of these insurers provide quotes on full buyouts, but the report projected a £5bn increase in capacity for 2018, leaving the potential for £25bn of liabilities to be insured.

However, this short-term capacity surplus could be impacted by Prudential’s exit from the UK annuity market in 2016. If it chooses 2018 to transfer a significant chunk of its portfolio, reportedly worth more than £30bn, capacity could be constrained in that year.

“You’d expect to see slices of that begin to move at some stage,” said Gavin Markham, head of bulk annuities at consultancy Barnett Waddingham. He said that if the transfer takes place incrementally there should still be capacity for pension schemes.

Should schemes start derisking now?

The UK’s theoretical aggregate buyout liabilities are in excess of £2tn, according to the Pension Protection Fund, although this would be impossible to absorb over a short period of time due to lack of capital.

Some of these liabilities will end up in the Pension Protection Fund or in self-sufficient schemes, but Markham expected “a good proportion” of schemes to insure at some point.

The pricing on offer for these insurance contracts will depend on the demand from pension schemes, as well as insurers’ ability to source well-priced assets and raise capital.

Given the difficulty of predicting all these factors, Markham said some sponsors and trustees may look to take advantage of current attractive pricing.

“If it fits with your longer-term objectives there is potentially that benefit of smoothing that pricing over time,” he said, adding that sponsors tend to view insurance more positively than investment-focused derisking, which leaves open the possibility for deficit increases.

No need to rush

Trustees should be wary of seeing self-sufficiency and bulk annuity transfers as binary options for their DB schemes, according to Mark Ashworth, chair of Law Debenture Pension Trustees.

“There’s a recognition that particularly for larger schemes the move to a complete buyout will be many years hence,” he said, meaning that consideration and implementation of self-sufficiency strategies will be relevant “even if you’re buying annuities for pensioners”.

In addition, he said trustees should not be scared into hasty buy-ins or buyouts.

“It needs to stack up independently, and I wouldn’t be tempted into a transaction on a ‘buy now because stocks might not last’ basis,” he said.