(March 20, 2014) — An announcement in the UK Chancellor’s annual Budget speech yesterday has led some pension consultants to speculate that defined benefit (DB) funds considering a buyout or risk transfer might be in line for a bargain.
George Osborne told the House of Commons that defined contribution scheme members reaching retirement would no longer be made to immediately purchase an annuity into which to pour their pension savings. The move, which removes a stranglehold the insurance industry has held on this area of the UK retirement market, sent listed insurers’ share prices plummeting as their shareholders became aware of a potential cut to a lucrative income stream.
A knock-on effect of this move could profit defined benefit funds, according to some consultants.
Gavin Markham, associate at Barnett Waddingham, said: “Several insurers are part of the thriving bulk annuity market, and if individual annuity sales are set to fall there may be increased competition in the bulk annuity market. It is entirely possible that trustees looking at the prospect of a buyout or a buy-in could snare a bargain as a result.”
Some of the leaders in the individual annuity market also have major footprints in the buyout sector, including Legal & General and Prudential, which have written several billion pounds of business over the past decade, and relative newcomer Partnership.
“Many multi-line insurers that offer individual annuities also have bulk annuity offerings, and to the extent there is a fall in sales of retail annuities it is entirely plausible that they will look for higher bulk annuity volumes to offset this,” said Emma Watkins, partner at consultants and actuaries LCP.
In recent years, the number of insurers operating in the bulk annuity field has dwindled from more than 10 to around half that number, due to takeovers, mergers, and company closures. After falling during the financial crisis, business has rallied and 2013 was one of the best on record for volumes of pension risk transferred in this sector.
“As in previous years, we see that pensioner buy-ins will account for the lion’s share of bulk annuity business and any increase in insurer appetite will be most welcome,” said Watkins.
“We could quickly see more, and hungrier, DB buy-out market participants,” said Ben Stone, risk transaction specialist at PwC. “This means increased competition and better prices for pension schemes looking to buy out.”
However, Pension Insurance Corporation, one of the largest bulk annuity providers in the UK, which does not operate in the retail pension market, said it was too early to tell how the changes would affect individual sales and any read across to the bulk annuity sector was highly speculative.
“Buyout and buy-in pricing is primarily driven by day-to-day movements in gilt yields and corporate bond spreads and how DB pension scheme assets are performing relative to gilts as a proxy for their liabilities,” said Jay Shah, co-head of business origination for Pension Insurance Corporation. “Such factors are of greater importance than any second order changes resulting from any shift from retail to the buyout and buy-in sector. In making decisions about de-risking, trustees should always have a solid, detailed decision making framework that can operate in a fast changing environment so that when market timing is right decisions can be effected before the opportunity slips away. The budget doesn’t change that either way.”
Stone at PwC concluded: “Before yesterday’s announcement we anticipated that 2014 would be a record year for pension scheme de-risking and this reinforces that. For schemes that are in reach of buyout, and many are now closer than they think, this is an extra reason to move quickly and capture the opportunity.”
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