News & analysis
Bulk annuity deals set new record
For the first time in history the bulk annuity market has exceeded £24bn in scheme buy-in and buyout transactions, representing a doubling in the market compared to previous years where the annual volumes have been of the order of £10bn to £13bn. Barnett Waddingham’s annual bulk annuity report highlights a step-change in the volume of bulk annuity activity rather than a gradual increase, with this heightened new level expected to continue during 2019 and beyond. Last year saw attractive pricing for schemes to buy a bulk annuity, which has carried over into 2019. For example, pensioner buy-in pricing has been at his- torically competitive levels relative to gilts, meaning the exchange of low risk assets for a buy-in can be compelling for many schemes.
FTSE 350 DB pension gap reaches 18-month high as bond yields fall
The accounting deficit of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies increased to £55bn at the end of March from £45bn at the end of February, according to Mercer. The firm’s latest Pensions Risk Survey shows that declining corporate bond yields prompted an increase in liabilities from £811bn to £847bn and was only par- tially offset by a fall in market implied inflation. Asset values increased from £766bn to £792bn during the period. Maria Johannessen, corporate consulting leader and partner at Mercer, said: “The pension gap has widened for the second consecutive month, despite a £26bn increase in asset values, and has now reached its high- est month-end level since October 2017 having doubled over the past year alone. A slight fall in medium-term market implied inflation to 3.45% was unable to miti- gate the decline in corporate bond yields which led to a £36bn increase in liabilities.”
The firm added that with political uncertainty and slowing growth, trustees should focus on risk .
Also ‘mega’ transactions, noticeably absent in 2017, re-emerged in 2018 with four transactions over the £1bn mark. Almost 40% of business written was for buyouts, compared to 20% in recent years, and included some high profile cases where the employer had previously gone insolvent, such as the BHS and Nortel transactions. Gavin Markham, partner and head of bulk annuity consulting, said: “Unprec- edented demand to complete de-risking transactions paved the way to a record-breaking year in the bulk annuity market. The improvement in pension schemes’ funding positions, as they continue to mature, is a significant factor in the increased level of demand supported by some extremely attractive insurer pricing by historical standards.
“Schemes are typically targeting a low risk position in their journey planning, with trustees and employers increasingly focussed on end-game planning. Defining the end-game helps provide a robust decision-making framework for a transaction. Liability management exercises can feature in the journey and materially enhance the affordability of a transaction.
“The bulk annuity market continues to evolve and provide opportunities for those with clear objectives and a considered route to transaction. Demand for de-risking through annuities is likely to increase as schemes mature further. It is essential for schemes to understand the market dynamics and how insurers operate. Preparing well and demonstrating transaction readiness will be key in gaining insurer appetite and positioning the transaction positively relative to other schemes.”
6 | portfolio institutional | April 2019 | issue 83
Gold rush among investors across Europe as Brexit volatility fears bite
Investors in Europe have piled more than $1.4bn (£1bn) into gold exchange-traded products so far this year. Investors now hold more than ever in gold products listed in Europe, roughly double since December 2015, when gold was at its lowest price in almost a decade. Investec, which saw $524m of net inflows into its Phys- ical Gold ETC, believes this flight to perceived safety is evidence that investors in Europe are positioning their portfolios more defensively amid political and economic uncertainty. Chris Mellor, Invesco’s head of EMEA ETF equity and commodity product management, said: “Gold is often used for portfolio diversification, due to its low correla- tion with equities, and it can also appeal to investors who want to take a more defensive stance during times of market stress. We believe many investors are now de-risking their portfolios and buying gold ETCs in case equity markets become more volatile as details of Brexit unfold.”
The flows into Invesco Physical Gold ETC represent a more than 10% increase in its assets from the begin- ning of the year.
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