The level of bulk annuity and longevity swap activity has disappointed so far in 2017, dampening industry expectations of a record year for the sector, according to Willis Towers Watson (WTW).
The consultant said a modest £1bn of pensions de-risking deals had been publicly announced this year, despite previously predicting the total value in 2017 would exceed £30bn.
In January, WTW said the volume of liabilities insured through buy-ins, buyouts and longevity swaps this year would return to a level last seen in 2014 (£39bn), dwarfing the £11bn in 2016 and £18bn in 2015.
However, it said deal flow had slowed in the early part of this year because an uptick in transactions towards the end of 2016, driven by favourable pricing, cleared the pipeline of activity in early 2017.
Among those publicly announced this year are the £100m Alcatel-Lucent buy-in with Pension Insurance Corporation (PIC) and TI Group’s £130m deal, also a buy-in with PIC.
WTW head of transactions Ian Aley said the disappointing figure comes despite pricing looking attractive from a buyer’s perspective relative to gilts.
Aley said pricing is attractive because on the back of Solvency II insurers have been able to source long-dated, high yielding and secure fixed income assets outside of corporate bonds, and apply their value to pricing.
In addition, he said competition among providers for deals between £100m and £300m has intensified, noting that there are currently seven insurers quoting on many deals.
This has been driven by two factors: firstly, because insurers have found it difficult to access supply of suitable high yielding assets to facilitate attractive pricing for very large bulk annuities; and secondly, as a result of heavy mortality rates in the winters of 2015 and 2016 which has reduced the cost of longevity hedging for buy-in providers.
Aley explained to PI: “If you are taking that [pensioner] risk onto your books as a reinsurer you have a dilemma: does that heavier mortality rate represent a change of trend or is it simply noise in a long-term historic trend?
“Until there is a series of years giving you evidence that this might be a move towards a change of what to expect in the future, then you would be reluctant to reflect that in pricing.”
Despite the slow start to the year, Aley predicted a “huge amount of activity in the next wave” because of the pricing situation.
Hymans Robertson head of risk transfer James Mullins also observed pensioner buy-in pricing continues to be cheaper than gilts.
“We saw schemes that were in a position to transact being able to take advantage of some particularly attractive pricing at the end of 2016,” he added. “This was driven in part by some insurers looking to meet business targets following a slower start to 2016 as the market implemented the new Solvency II regulations.”
Like WTW’s Aley, Mullins said there continue to be some attractive opportunities available in 2017 because pension schemes are still able to complete a buy-in for less than the value of gilts held to back the same pensioner liabilities.
