Bulk annuity market behaviour driven by Solvency II, claims Aon

Aon Hewitt has said that there are clear signs that changes in regulation are changing behaviour – and the timing of deals – in the pension scheme bulk annuity market.

A series of bulk annuity deals were completed in the first few weeks of 2017, in which organisations including Alcatel-Lucent, Smiths Group and the Civil Aviation Authority all secured deals for their defined benefit (DB) pension schemes.

Martin Bird, senior partner at Aon Hewitt and head of the risk settlement group, said: "One of the key drivers in the timing of these deals was insurance companies’ need to comply with Solvency II’s rules on capital reserves. While much of the background work was completed in 2016, the need to manage year-end balance sheets and, in particular, the process for transitioning assets into matching adjustment portfolios caused deals to tip over into the new year. This is a quite a contrast to previous years where there was always a last minute frenzy to get deals done in early December before the markets closed down for Christmas."

He added: "Pricing of annuity deals is also taking a very different complexion in the new regime, particularly as insurers are increasingly seeking out assets that give them a competitive pricing edge and which satisfy the new regulatory requirements. This is leading to insurers investing in long-dated illiquid assets, including infrastructure, property assets, mortgage related securities and bespoke debt arrangements. This in turn is leading to a much greater spread in available pricing at any given time, depending on these assets’ availability and the way they can be managed into insurers’ matching adjustment portfolio.

"So what do these changes in insurers’ behaviour mean for pension schemes? Bigger spreads of pricing are good news for pension schemes – but only if the scheme is ready. The schemes that have completed deals will have done their groundwork properly. They will have made certain their scheme data is in good order and they have been patient. They will also have waited for the right price to materialise and were therefore able to move when the moment was right."

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