On the go: Strong demand for bulk annuity transactions is likely to persist until the end of the decade, with annual liability deals totalling around £40bn, according to a new report from Moody’s Investors Service.
Although activity slowed a little in 2021, Moody’s predicted that profit margins for life insurers will remain healthy, while demand is also seeing annuity writers increase their allocation to illiquids, which allows them to reduce investment risk while delivering relatively high long-term returns.
Moody’s report suggested that mid-sized deals, made up of defined benefit liabilities of between £100mn and £500mn, will account for the bulk of transactions over the coming years. However, there will also be a “significant number of jumbo” transactions, covering liabilities of £2bn or more, “which will bring opportunities to unlock economies of scale”.
Demand is being driven by corporate desire to offload DB risks, with most schemes now closed and consuming “a disproportionately high amount of resources”, the report stated.
It is also being driven by improved scheme funding levels, rising levels of regulator scrutiny — accelerating moves to buyout — and more favourable bulk annuity pricing.
Additionally, the Covid-19 pandemic and subsequent market shocks will have increased many employers’ “already strong desire to offload the financial and longevity risks associated with their DB pension plans”, it continued.
It added, however, that longer-term demand may begin to weaken as alternative ways of transferring pension risk, such as superfunds, emerge.
“Regulatory guidance prohibits schemes on course for a buyout within five years from pursuing a superfund transaction. We therefore expect superfunds to have a limited impact on demand for now,” the report explained.
“However, they could dampen activity if more DB schemes opt for an early exit via a superfund, instead of building up their funds to the levels required for a [bulk purchase annuity] over 10-15 years.”
At the end of 2021, Clara became the first commercial consolidator to officially enter the market when it gained clearance from the Pensions Regulator.
