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Pension scheme de-risking set to rebound

04 January 2017


UK defined benefit (DB) pension scheme de-risking deals will approach record levels in 2017, according to Willis Towers Watson, following a dismal year

Read more: Defined benefit pension de-risking longevity risk

Willis 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 swaps.

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 was bouncing 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".

Longevity reinsurance

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.


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