Bulk annuities | Feature


transfer at Prudential, pointing out that the historical average is between 1% and 3%. This, Kessler says, is the result of medical innovations in the 1990s coming into effect, such as statins. Everyone who needed them had them by 2011, so they are no longer pushing longevity higher. The result is life expectancy only improved by 2.5% in the six years to 2018.


In 2019 mortality improved between 4% and 6%, Kessler says. “2019 was the first year where no one lowered their price because we are still trying to work out if the year is an anomaly or the beginning of a trend shift, where we go back into a period of higher improvement. We will not know until the cause of death data is made availa- ble [next year].


“The reason why pension funds poured into the longevity market is that after seven or eight years of lower than expected lon- gevity improvements and a reduction of the liability price every single year, there will not be a reduction while the insurance and reinsurance community try to figure out where we sit. “If it is a trend shift, prices will go back up,” she adds. “So we have seen many pension funds pouring into the longevity risk trans- fer market right now.”


UNREWARDED RISK


The schemes that typically secure bulk annuity transactions are well funded and have already reduced much of their interest rate and inflation risk. “When you start tak- ing investment risk out of pension schemes, longevity risk starts to pop up as the dominant risk in the portfolio,” Baines says. When assessing a potential deal, PIC looks closely at the sponsor’s governance process to see if it is robust enough to make deci- sions quickly, rather than having to wait months for a quarterly trustee meeting. A scheme will also attract PIC’s attention if it has a competitive advantage, such as expo- sure to a particular social-economic group, has indexation in the benefits or an unusual benefit structure. However, the crucial point that insurers look for in a bulk annuity deal is can they


underwrite the risks. They only get one chance to price the liabilities, so they need to get it right.


RISING DEMAND The risk settlement market has grown rap- idly in recent years, but with insurers tak- ing on so much risk in such a short space of time, could the market have peaked? No, says Towners, who explains that insurers recognised years ago that there would be a “tremendous” demand from schemes look- ing to settle their longevity risk and scaled their operations accordingly.


Of the eight insurers covering this market, the three largest – PIC, Rothesay Life and Legal & General – have bulk annuities as a core area of expertise, it is what they do. “I do not see any of those three to stop writing business in this space,” Magudia says.


De-risking pension schemes is a huge and growing market; and huge and growing markets attract attention. Indeed, new play- ers are offering an alternative to insurance. The so-called superfunds have arrived with a promise to lower costs through consoli- dating and managing the assets of DB schemes. The Pension SuperFund and Clara-Pen- sions are the first superfunds to be touting for business with the former closing its sec- ond deal in July worth £300m. LGIM’s Towners is not worried by such competition. “It is a big market and there is space for their innovation,” he says, “but everyone in the industry believes that buy- ins and buyouts are the gold standard as it comes with the protections that insurance offers.”


This is a reference to insurers having to


This is a big and growing market and we


expect it to get bigger and bigger. Mitul Magudia, Pension Insurance Corporation


“They have in recent times raised capital to write more business. This is a big and growing market and we expect it to get big- ger and bigger. “At the moment, I don’t see any drying up, any


imbalance between supply and


demand,” he adds. “If the market doubled again it might be interesting to see what would happen.” Magudia would not be surprised if the value of the bulk annuity market fell this year, predicting that it could be worth in the region of £30bn unless there are a group of larger transactions. Perhaps this could be the result of a potential rise in pricing. The size of the market is not his concern. “We are not focused on volume from year- to-year or looking for continuous increases,” Magudia says. “We are looking for a sensible proportion of the overall mar- ket to retain market share.”


TO INSURE OR NOT TO INSURE


hold cash in reserve to back up their pen- sion promises, a requirement under the Solvency II rules. The consolidators are not required to hold as much cash, so they are competing against the insurers on price. Yet the superfunds are pitching their ser- vices to schemes at different stages of their funding journey than the insurers are. Con- solidation is an option for schemes which are not in a strong enough financial posi- tion to attract the interest of an insurer. “We recognise that not every scheme can afford a buyout as the sponsor may not be in the most robust shape,” Towners says. Despite this, he warns sponsors of under- funded schemes not to rush into such arrangements.


“I would rather hold out for a couple of years to generate an excess return on my investments, get some more cash from my sponsor and get the gold standard for my members rather than rush into something less,” he adds.


Issue 89 | December-January 2020 | portfolio institutional | 41


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