UK bulk annuity market to beat all records in 2018

UK bulk annuity transactions are set to reach £30 billion in 2018 for the first time, making it a “bumper year”, according to Aon.

For the fourth year in a row, transactions in 2017 are likely to exceed £10 billion – despite the market not seeing any reported single transaction exceeding a billion for the first time in five years. This reflects a further increase in the core growth of the market, Aon said in a Dec. 14 statement.

“As we move towards 2018, Aon is expecting the re-emergence of the ’mega-deals’, with a very strong pipeline of £1 billion deals already in place, relating to both pension schemes and insurer back-books,” said John Baines, partner in Aon’s risk settlement team.

“This increase in market activity has been driven by two factors. First, financial positions of schemes continue to improve, which has resulted in an increased focus on de-risking for both trustees and sponsors. In particular, we have seen an increase in sponsors using bulk annuities to make a clear statement to shareholders that pension risk is under control.

"Secondly, the pricing of bulk annuities compared to other low risk assets is at a nine year low. This has been driven by increasing innovation within insurers’ investment strategies, greater competition, and a reflection of the latest longevity trends, which show life expectancy expectations are lower than previously predicted and which are now largely factored into reinsurance pricing."

Baines, continued: “Given the good pricing available, the time looks to be ripe for pension schemes aiming to acquire a bulk annuity. However, schemes – now more than ever - need to be serious when they approach the market. Schemes need to be able to align and articulate the strategies of all the key stakeholders - the trustees, sponsor and members. Schemes need to be clear about which benefits they are insuring, and of the structure of deal from the outset.

“In the past, a speculative approach to test the market has been tolerated, but we expect such approaches to result in disappointment in 2018. Insurers are increasingly focusing their resources on those that are most likely to transact.”

Aon expects the market to be busy throughout 2018. The increased level of activity means that some schemes might need to be patient, waiting for prime insurer appetite and financial conditions before they look to de-risk.

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