Bulk Annuity Transfer Prices Reach Record Lows, Says Towers Watson

Further risk transfer deals are expected for 2013, after bulk annuity pricing levels become more attractive.

(29 July, 2013) — UK buy-in and buyout transactions could surpass £5 billion in 2013 after the pricing for bulk annuities reached low levels not seen since 2012, according to research from Towers Watson.

The combination of government bond and high-quality corporate bond yields rising, a brief rally for equities to narrow funding gaps, and better management of pension fund data has created buying opportunities.

Ian Aley, a senior consultant at Towers Watson, said: “The recent buyout transaction for the EMI Group Pension Fund took the value of bulk annuities written so far this year to over £3 billion. This compares with just over £1 billion at the same point in 2012.”

“We expect that the recent improvement in bulk annuity pricing will result in more pension schemes taking advantage of the favourable investment conditions. We are back to the 2012 pricing environment where schemes have the ability to exchange their gilt investment for an annuity policy that provides a better match for their liabilities at no additional cost.

“Based on the transactions we have helped negotiate and the conversations we are having with insurers, the activity levels remain high and the amount of buy-in and buyout business written this year should exceed £5 billion.”

Unlike in 2008, 2013 could be the year for non-pensioner member deals, such as longevity hedging arrangements for existing scheme members. In previous years, the pricing for these members has been a long way from that for pensioner members that the gap appears to have closed this year. 

Insurer LV= completed one such deal at the end of 2012, with a £800 million deal with reinsurers Swiss Re to take on a bespoke longevity swap for pensioners and non-pensioners aged over 55.

“This could make whole-scheme buyouts more affordable for scheme sponsors and add to the level of activity we are already seeing,” Aley added.

The drop in providers of bulk annuity transactions since 2008 has done nothing to dampen the capacity in the marketplace, according to Aley.

Paternoster closed to new business in 2008, Aegon withdrew from the market in 2010, Legal & General’s bought Lucida in 2013, Aviva has refocused on smaller buy-in deals only, and Metlife has only written a small amount of business in the past 12 months.

Similarly, Credit Suisse, UBS, and Nomura had begun to move into writing longevity swaps or other pensions business, but most have since pulled back from the market, in part because of new capital adequacy rules imposed by Basel III.

But Aley insisted the market remains competitive, with a strong appetite both from insurers and the pension schemes themselves.

The number of transactions has been assisted greatly by pension funds getting their data in order prior to the transaction. Towers Watson estimated that 90% of pension funds who asked for a quotation have ended up transacting soon after.

The appetite for risk transfers isn’t limited to the UK: last month Glenn O’Brien, managing director of Prudential’s pension risk transfer business, told aiCIO the US was also starting to see an increase in sponsors willing to transact.

“I was less optimistic [about the buyout market] at the beginning of the year, as companies were focusing on their year-end disclosures. But the macro-economic situation has improved and we’re starting to see a pick-up in interest in companies willing to deploy cash,” he said.

“As funded statuses improve through the movement of rates, pension funds will find they’re closer to being fully funded. It’ll be hard for a lot of transactions to happen all at once, but certainly more will be considering a pension risk transfer.

O’Brien added that the US pension risk transfer market would “top $5 billion” in deals this year, adding: “I get the sense there’s potential for one or two more large deals this year too.”

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