On the go: Demand for longevity swaps is expected to set new records in 2020, reflecting in part a slight slowdown in the bulk annuity market, according to a report by Willis Towers Watson.
Though typically very few longevity swap deals are completed each year, 2020 is on track to see transactions worth as much as £25bn.
An expected decline in bulk annuity deals will create an appetite among reinsurers for new longevity swaps, in turn making them more affordable, the report said.
Commenting on this trend, Ian Aley, head of transactions at Willis Towers Watson, said: “Naturally there are questions about what Covid-19 means for ongoing longevity swap processes. Whilst the impact on each scheme today can be monitored, the prospects for future improvements in life expectancy are perhaps more uncertain than they ever have been – and it’s going to be many years before we know in full how Covid-19 and its economic side effects will affect [life expectancy].”
“Our clients are taking the view that if they can afford to hedge longevity risk and the pricing looks attractive, now is a good time to proceed, rather than attempting to predict where the market might go in the future,” he said.
Though the bulk annuity market will remain busy, Willis Towers Watson predicts the total value of bulk annuity transactions will fall to £20m-£25m, half the heights reached in 2019.
Pensions Expert reported in May on research from LCP that suggested the number of big, multi-billion-dollar transactions would decline, leaving space for a larger number of small schemes to pursue their own deals.
“It was the schemes that were already in the market who were able to take advantage of the strong pricing we have seen,” said Shelly Beard, senior director at Willis Towers Watson.
“Although credit spreads have narrowed again over the last eight weeks, there is still potential for more attractive pricing over the remainder of the year. This is due in part to potential market volatility, but also because insurers are likely to seek out ways to compensate for a fall in new business volumes.”
This process could bring about the return of the “end-of-year sale,” she said, adding: “Schemes who wish to take advantage of that will need to get into the market shortly.”
