PensionsJan 12 2016

Bulk annuity market predicted to surge in 2016

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Bulk annuity market predicted to surge in 2016

Willis Towers Watson are predicting an increase in pension de-risking transactions this year, and said the new Solvency II regulations won’t diminish appetites for deals.

Shelly Beard, senior consultant in Willis Towers Watson’s de-risking team, said that while 2015 was relatively quiet for the bulk-annuity and longevity-hedging markets, compared to 2014, appetite from both pension schemes and insurers picked up significantly in the latter part of 2015.

She said more than £5bn of liabilities were secured with insurers via longevity hedges or bulk annuities in the last quarter of 2015.

In November and December, the company helped its clients secure eight separate bulk annuities, covering more than £650m of liabilities.

According to the company, 2016 will start relatively slowly for the bulk-annuity and longevity-hedging markets but will pick up around spring.

Shelly Beard, senior consultant in Willis Towers Watson’s de-risking team, said: “While most insurers spent much of 2015 preparing for Solvency II, final sign-off on reserving requirements was not provided by the Prudential Regulation Authority until December 2015.

“This means that as insurers start to submit responses to quotation processes in early 2016, there will inevitably be a period of price discovery for both pension schemes and insurers, as the market looks to understand how different players have been affected by the new reserving rules.

“Our current understanding is that, overall, there will be very little impact on buy-in pricing for pensioners, but pricing for non-pensioners could increase by up to 5 per cent, although this will vary across insurers.

“However, we do not expect this to limit the growth of the market in 2016 as, to date, non-pensioners have only represented a small part of bulk annuities secured.”

The company estimates that there are likely to be longevity-hedging deals covering over £20bn of liabilities this year.

In the bulk-annuity market, allowing for the bedding-in of Solvency II, the company expects continued growth during the year with around £12bn of liabilities transferring to insurers.

Ms Beard said: “Two new insurers completed deals in the second half of 2015 in the small to medium-sized transaction market and we expect there are several other companies closely monitoring the marketplace with a view to developing bulk-annuity propositions.

“In addition, there is currently significant interest in the UK bulk-annuity market from potential suppliers of capital, which will allow both existing providers and new entrants to continue to write sizeable new business. This can only be a positive development from pension schemes’ perspectives, with new entrants driving prices down and innovation up.”

Karen Cooper, principal, IFA and equity release specialist at Clarity Wealth Management, said: “There is a broad section of products and with a large client bank, we actively look at de-risking. Looking at the portfolio is good planning.

“There is much more flexibility in the market.

“Clients can de-risk but without spending on annuities. As a practice, we are not finding many clients going down the annuity route but looking at mixed-asset, so they are not going to have any nasty surprises, and if they suffer ill health, options can be swithced on.”