Transfer volumes could hit £600bn as insurers post strong results

Of those that have released their results so far, Aviva saw bulk annuity sales increase by 15 per cent, rising to £1.9bn, which compares with £1.6bn in H1 2021. Standard Life’s new business long-term cash generation comprised £282mn from its bulk annuities business, significantly up from the £80mn across the same period last year.

Legal & General, meanwhile, saw its profit underpinned by the performance of its annuity portfolio and the strong global pension risk transfer market, leading to new business volumes of £4.4bn — up from £3.1bn in H1 2021, with the £3.7bn in pension risk transfers exceeding the £2bn registered in the same period last year. It said it expected to write £40bn to £50bn of new pension risk transfers in the next five years.

Elsewhere, it was reported that Phoenix Group, which overseas Standard Life, was raising its dividend after “record” results saw its business revenues double to £430m in H1 2022 from £206m in H1 2021. Six bulk purchase annuity deals with pension schemes made for £282mn in new business.

Deal pipelines are continuing to fill up quickly for the second half of the year, suggesting that 2022 has the potential to close with the highest annual volume transacted in the history of this market

Leah Evans, EY-Parthenon

Andy Curran, chief executive of Standard Life, part of Phoenix Group, said: “Phoenix Group has once again delivered a record set of results in the first six months of 2022, supported by the growth in our Standard Life business. 

“The bulk purchase annuity team has again delivered in the first half of the year with £1.6bn of premiums contracted, growing our presence in this highly competitive market, while our workplace pensions business demonstrates excellent momentum acquiring 42 new scheme wins, with a healthy pipeline in place.”

Commenting on the overall trend in the risk transfer market, EY-Parthenon’s head of pension risk transfer, Leah Evans, said “favourable market conditions” had seen schemes’ funding levels “improve significantly”, making buy-ins and buyouts more affordable, which resulted in transaction volumes of more than £12bn in H1 2022, compared with around £8bn in the same period in 2021.

“Deal pipelines are continuing to fill up quickly for the second half of the year, suggesting that 2022 has the potential to close with the highest annual volume transacted in the history of this market,” Evans noted.

“There is uncertainty, however, over the potential impact on pricing from Solvency II, and this may lead to changes in supply or demand over the next 12 months as the rule changes become clearer.”

EY bulk annuity consulting lead Chris Anderson noted that strong growth and returns “have resulted in several prospective new entrants exploring entry, which could shake up the market in the medium term”. 

“The Solvency II review remains very high on the agenda of bulk annuity providers, with the impacts on capital and pricing currently uncertain. Providers are continuing to engage actively in the debate with the Treasury and the [Prudential Regulation Authority],” he added.

A capacity crunch?

In its third-quarter risk settlement bulletin, published on August 15, Aon noted that bulk annuity insurers were reporting their “strongest pipeline” of annuity auctions “for some years”, with a particular emphasis on full scheme buyouts.

It cited improved scheme funding levels, attractive annuity pricing, and lower pension liabilities due to a rise in yields as factors contributing to the increase in demand.

Aon warned, however, that insurers themselves could be facing a potential “capacity crunch”, as this demand is “expected to remain strong for the remainder of 2022”, including a “substantial number” of transactions exceeding £1bn.

“While there are a number of different factors that will impact an insurer’s ability to quote on a transaction, the main constraint currently stems from people capacity,” it explained.

“While we have seen significant recruitment in this area from some insurers and reinsurers, pricing teams remain stretched, resulting in insurers not being able to keep up with current levels of demand. 

“This has caused insurers to be increasingly selective on which transactions they will quote on in the short term, with an increased focus on schemes of all sizes carrying out thorough preparation ahead of approaching the market.”

Though the trend remains for insurers to take on transactions of all sizes, the bulletin noted that smaller transactions of £100mn or less risk being crowded out in the “busy marketplace”, making it increasingly important that schemes are able to compete for insurers’ attention.

“While it is encouraging to see this high level of market growth, there is a question mark over insurer capacity to meet demand, and smaller schemes — especially those with more complex features and structures — may find it more difficult to generate interest,” Evans said. 

“Insurers, however, are continuing to innovate and streamline their processes to address this. For schemes, the message continues to be that good preparation is key to a successful transaction.”

No end in sight

Analysis from JPMorgan, published on August 8, suggested that demand and transaction volumes will continue to grow, potentially representing “a £600bn growth opportunity in the next decade”.

Its report noted that there are more than £2tn of defined benefit pension liabilities on the balance sheets of UK corporations, and that this represents a significant burden due to the funding constraints entailed by low bond yields, volatile markets, and accounting rule changes.

DB liabilities are “volatile and onerous to manage”, leading to “huge pent-up demand from corporates to pass these liabilities on to insurers or to derisk — creating a substantial growth opportunity for UK life insurers focused on this segment”, the report said.

It listed three factors accelerating demand for pension risk transfers: the volatility and difficulty of managing liabilities; higher funding levels increasing interest in bulk annuities; and the proliferation of risk transfer solutions — some of which act “as a half-way house to a buyout or buy-in of liabilities through bulk annuities”, the report explained.

These include longevity insurance, assured payment policies and insured self-sufficiency, which “are less expensive and provide a risk-transfer solution for schemes that are less well funded at the current time”.

These three factors combined make for significant growth opportunities in the sector, the report continued, which across the next decade could rise to £600bn — more than 2.2 times the level of risk transfers written in the preceding decade.

“To put this in context, UK life insurers currently manage [around] £1.5tn of assets on their balance sheets, so this growth opportunity is equivalent to 40 per cent of the current [assets under management] of the UK life insurance industry,” JPMorgan said.

The report did note, however, that there is a high barrier to entry in the insurance market, such as Solvency II’s high capital requirements combined with regulatory scrutiny, the need for expertise and a high level of trust, as well as a well-managed asset platform either in-house or third party, combining to limit the number of insurers able to write new business.

Nevertheless, this would make for higher returns for those few companies.