SSE wipes off £1.2bn of longevity risk

Around £5bn of liabilities are estimated to have been transferred to insurers in the first half of 2017, with consultants predicting that the bulk annuity market could quadruple in size as schemes mature over the coming years.

£250m of pensioner liabilities for the £2.2bn Scottish Hydro-Electric Pension Scheme and £100m in the £1.1bn Scotia Gas Networks Pension Scheme were insured with the Pension Insurance Corporation.

The insurers are going to prioritise the schemes that are well prepared, know what they’re doing and have been there before

Ken Hardman, LCP

SSE removed a further £800m of longevity risk from the Sheps via a transaction with Legal & General.

The schemes claimed to have seen a significant improvement in their funding levels as a result of the insurance policies, but declined to disclose updated liability figures. The latest actuarial valuation of the Sheps stated a funding level of 97.5 per cent in 2015.

Golden opportunity

Hymans Robertson, the lead advisor on the transactions, expects demand for bulk annuities to quadruple during the next 15 years, suggesting that £700bn of DB liabilities will have been passed to insurers by 2032.

James Mullins, head of risk transfer solutions at the firm, argued that pricing from insurers is currently attractive, primarily due to new entrants to the market in recent years.

Scottish Widows and Canada Life both began writing bulk annuities in 2015, while Phoenix Group has also looked to expand into the sector.

“New entrants always have quite an impact on pricing because they’re keen to get their first few deals over the line to increase credibility,” said Mullins. He expected attractive pricing to continue through the second half of the year, as insurers who are “a bit behind budget” look to hit their targets.

Prices could rise

Mullins favoured gradual buy-ins and longevity insurance over waiting for buyouts, not least because employers are “fed up with all the volatility” caused by DB schemes on their balance sheets.

Moreover, he said, pricing may not always be so attractive: “The demand from pension schemes will only ratchet up over time. At the moment I think it’s a buyer’s market but that will change.”

Ken Hardman, a partner at Lane Clark & Peacock with a focus on derisking, agreed there is a risk that insurer capacity may not be able to keep up with scheme demand in the future.

“The insurers are going to prioritise the schemes that are well prepared, know what they’re doing and have been there before,” he said, advocating a series of buy-in transactions to reduce risk while building relationships with insurers.

While selling off gilt holdings to insurers may provide attractive pricing for risk reduction, it can also increase the scheme’s exposure to interest rate and inflation risk. Hardman said this was avoidable if properly managed.

“You need to be careful about your hedging levels,” he said. “We’d always recommend that you look at your investment in the round, and just make sure that you can support a buy-in.”

How clean is your data?

When approaching insurers for quotes, schemes with good data quality are likely to attract the best pricing.

However, trying to fix every discrepancy could take a long time, and according to Daniel Taylor, director at administration specialist Trafalgar House, could mean schemes “run the risk of having the market move away from them”.

“Trustees should try and get data in as good order as they can beforehand but once pricing is secured trustees normally have a further period to analyse the data to a much more granular level and put in a plan to fix any major issues,” he said

One area that should be prioritised before entering into a bulk annuity contract is the link between funding and liabilities.

Taylor said: “If trustees haven’t had a benefit audit and rule review they could find that a mismatch between the administration practice and rules exists that creates a gap between targeted funding and actual liabilities.”