Positive outlook for bulk annuity transactions in 2022

Volumes recovered late this year and are expected to close at around £30bn, despite a slow start, according to a report published on Wednesday by the consultancy.

Just £7.7bn of buy-ins and buyouts were completed in the first half of 2021, but things have become “much busier” towards the end of the year, the research found. The slow start was attributed in part to the effects of Covid-19.

“Some may have made less progress in their planning and preparations for a transaction, which would otherwise have hit the market in the early part of 2021,” the report stated.

“The relatively slow start to the year means a number of insurers may not have fully reached their goals from the beginning of the year, potentially increasing appetite as we come to the year’s end and head into 2022.”

Although less than the heights reached in 2019, 2021’s £30bn worth of bulk annuities would be in line with volumes for 2020, which was the second busiest year on record.

Pensioner buy-in pricing returned to pre-pandemic margins above gilts, and “continues to remain at an attractive level for schemes looking to derisk”, the report continued, with a significant portion of schemes expected to reach buyout funding over the next 10 years.

This could lead to “a potentially marked increase in market demand in the period five to 10 years out”, it explained.

“Trustees and sponsors can put themselves in a stronger position to transact and ensure that the bulk annuity contract delivers against its objectives by looking further ahead to the ultimate endgame of pension scheme wind-up. This longer-term perspective helps tailor transaction preparations and empowers scheme stakeholders to manage their residual risks,” the report stated.

Gavin Markham, partner and head of bulk annuity consulting at Barnett Waddingham, said: “The pipeline of business for 2022 from schemes seeking to insure their liabilities already looks very healthy. Both the supply and demand sides of the market are likely to support a very busy marketplace going into the new year.

“Although the economic outlook may, at first glance, appear more positive than at the beginning of 2021, the industry needs to remain vigilant. Uncertainty still remains around the future progression of Covid-19, continuing implications of the UK’s exit from the EU, as well as global macro challenges — all of which give the possibility for headwinds for pension schemes and the bulk annuity market,” he continued.

“As we look at the medium to longer term, the high level of demand from pension schemes is only set to continue as they head towards their ultimate goal. Future demand will inevitably come from a significantly greater number of schemes in a position to fully secure their liabilities via buyout, as well as partial buy-ins for those schemes navigating the overall derisking journey and strategy for delivering the endgame.”

Markham added: “There is no ‘one-size-fits-all’ approach as every scheme will have its own path to follow, but each will have to consider numerous possibilities, potential storms or opportunities along the way. In order to achieve the best transaction outcome in what is set to be an increasingly busy market in the years to come, schemes must be well-prepared. Transaction readiness and a thorough understanding of market dynamics are key to maximising insurer appetite.”

The positive market outlook is also mentioned by Fitch, which found “favourable fundamentals” as the UK’s life insurance market overcomes the challenges of Covid-19.

“We also expect further growth in net inflows for most UK asset and wealth managers, supported by a strong demand for workplace retirement savings and an overall economic recovery,” it said.

Though UK life insurers remain exposed to the risk of low interest rates, they have limited exposure to rising inflation thanks to a high degree of hedging.

All rating outlooks are now considered “stable”, an improvement over 2020, when 40 per cent of outlooks in the sector were “negative”, the Fitch report continued.

Underlying profit is expected to grow, reflecting increased business volume, and Fitch’s own research supported Barnett Waddingham’s contention that bulk annuity volumes will rise as the industry continues its post-Covid recovery.

Individual annuities are likewise expected to keep growing, as well as demand for illiquid assets.

Fedor Smolyakov, director of insurance at Fitch, said: “Our improving outlook on the UK life insurance market is driven by the more favourable operating environment in 2022 compared with 2021.

“We expect the pension derisking market to grow in 2022 and 2023, underpinned by strong structural demand from corporates derisking their balance sheets. This is supported by improved pension scheme funding levels and, consequently, a rise in the number of schemes looking to derisk.”