Towers Watson (WTW) has predicted that over £30bn
($36.8bn) of UK defined benefit (DB) pension scheme liabilities
will be insured in 2017, through buy-ins, buyouts and longevity
This represents a strong rebound, following a substantial dip
during the last two years to £18bn in 2015 and just
£11bn in 2016, towards the £39bn of activity
observed in 2014.
Strong insurer pipelines, greater engagement from smaller
schemes and improved buy-in affordability are some of the key
developments it expects to feature in 2017.
Shelly Beard, a director in WTW’s de-risking team,
said: "Relative to the preceding 18 months, the second half of
2016 saw a marked increase in the value available in the bulk
annuity markets." She anticipates 2017 to start from "a very
healthy position in terms of appetite and deal pipelines".
In addition to schemes considering de-risking strategies for
the first time, she expects that many others that undertook
buy-in transactions over the past few years will return to the
market to further de-risk.
WTW is not the first to predict a return of buyout business.
JLT Employee Benefits (JLT) announced that de-risking
back after an extremely slow first half of 2016, as
reported by Global Investor in late December.
While market conditions had been challenging all year there was
a "flurry of late deals closing this quarter," according to
Ruth Ward, senior consultant at JLT, at the time.
Back book competition
The low of 2016 resulted from several factors including
insurers allowing for the bedding-in of Solvency II and events
such as the Brexit referendum causing uncertainty across the
market, according to WTW.
Some insurers were also distracted from new pension
transactions by taking on so-called back book business, buying
business from other insurers looking to offload historic bulk
and individual annuity business.
While this trend has probably peaked a number of insurers are
still looking to transfer historic business. This was the case
in 2016 when AEGON transferred £9bn of liabilities to
Rothesay Life and Legal & General.
"We expect that this element of the market may distract some of
the buy-in providers at various points in the year," said
Beard. However, she noted that some insurers may offer more
attractive pricing opportunities "if they have been left
disappointed after missing out on attractive back books".
An important component of de-risking is removing longevity
risk, the potential for increased cost if pension scheme
members living longer than expected. Both pension schemes and
insurers can seek to pass this risk to reinsurance firms.
In 2016 business from insurers crowded out pension schemes
looking to remove longevity risk directly.
In 2016 £9bn of DB liabilities were hedged through
approximately 100 bulk annuities while only £2bn of
longevity risk was passed by DB schemes into the reinsurance
market. By comparison, in 2015 £12.3bn across 175 bulk
annuity deals and £6bn of longevity swaps.
"In the second half of 2015 and 2016, the longevity
reinsurance market was dominated by insurers transferring the
longevity risk associated with their new and existing bulk
annuities," said Beard.