Buoyant bulk annuity market good news for corporate sponsors, says expert

Pensions expert Robert Tellwright of Pinsent Masons, the law firm behind Out-Law.com, said 2018 had been as good as expected for the market.

“The large volume of deals already written this year suggests that commentators were right to be bullish about the prospects for the bulk annuity market in 2018," Tellwright said. "Insurance pricing continues to be favourable, making the transfer of pension risk an increasingly viable option for many schemes." 

“This will be welcome news for those corporate sponsors who have invested heavily in their pension schemes over recent years – a transfer of their pension liabilities could have a significant effect on their free cash flow and their ability to invest in the future growth of their business,” Tellwright said.

Last week pensions consultancy Hymans Robertson told the Financial Times that it expected £18 billion in bulk annuity deals in 2018, with more than £8bn agreed so far. Major announcements include last week’s deal between Siemens and the Pension Insurance Corporation, which will cover £1.3bn of pension liabilities for the company.

“The deal volumes we are seeing also suggest that trustees and sponsors continue to value the security they get from transacting with a regulated insurance company," Tellwright said. "They are not sitting on the fence waiting to see what the new pension consolidation vehicles can offer."   

“These vehicles will soon be seeking to disrupt the market by offering a cheaper alternative to transacting with a regulated insurer. This is likely to present some interesting opportunities for sponsors, but also additional risks, and it remains to be seen what regulatory action, if any, will be taken to ensure a level playing field between insurers and consolidators,” Tellwright said.

The pension consolidation vehicles will not be subject to European capital requirements governed by the Solvency II directive, which would enable them to offer lower prices but with more risk involved.

Solvency II came into force on 1 January 2016 and increased the amount of capital that European insurers must hold in relation to their liabilities depending on their level of risk. Annuities are treated relatively harshly due to the risk that policyholders will live longer than expected.

In January consultancy LCP said there would be a 50% increase in the volume of defined benefit pension liability transfers this year due to ideal market conditions.