While the chancellor’s Budget scrapping of compulsory annuitisation has sent individual annuity sales tumbling since March, the move has driven corporate defined benefit pension scheme buy-in and buy-out activity to record levels.
Consultancy LCP’s annual report on the insurance de-risking market has predicted that for the first time ever, the value of buy-ins and buy-outs written in 2014 is on track to pass £10bn and activity should outstrip this marker next year.
The report suggested that George Osborne’s announcement fundamentally changed how insurers approach the UK pensions market, freeing up capacity from individual annuities to support competitive pricing for bulk deals.
Buy-in and buy-out volumes have doubled within two years, with £10bn premium per year set to become the ‘new normal’ as an increase in supply and expertise matches growing demand.
By this point 20 per cent of FTSE 100 companies with UK with DB pension schemes have now completed transactions, with LCP’s research showing there will continue to be significant demand if the economy stays on a steady course.
Legal and General’s recent results revealed that while individual annuity sales fell 61 per cent in the nine months to September, bulk annuity sales increased 29 per cent in the third quarter of this year.
Clive Wellsteed, partner at the firm, commented that 2015 will be another strong year in the insurance de-risking market.
“The transactions undertaken by the ICI and total pension plans demonstrate that larger plans now have a genuine choice of a buy-in or longevity swap. Smaller schemes will benefit from new entrants looking to build their track record and the continued streamlining of terms and process.”
Emma Watkins, another partner at LCP and co-author of the report, added that record insurer capacity resulting from the Budget statement will help to maintain competitive pricing as demand trends upwards.
“Competitive pricing is set to remain as insurers continue to be successful in sourcing attractive long-term investments. Several potential new insurers are set to join the market.
“This will further increase competition in 2015 providing extra confidence in the accuracy of our prediction that buy-in and buy-out volumes are on course to remain in excess of £10bn a year.”