Aon: Illiquid assets boost bulk annuity pricing

Aon graphBulk annuity pricing has improved over the first half of 2016 as insurers have sourced better yields from illiquid assets says Aon Hewitt’s latest UK Bulk Annuity Update.

The report says Brexit-induced volatile market conditions have presented a series of pricing opportunities this year. But pricing has also been improved as insurers have adapted to the stronger reserving requirements of Solvency II, the insurance regime effective from 1 January 2016, allaying fears that the new solvency measure would make bulk annuities more expensive.

Ay end of June, pricing relative to gilts was at an attractive level says Aon, with some annuities able to achieve a yield exceeding 0.30 per cent a year above gilts. Combined with medically-underwritten pricing, yields up to 0.5 per cent a year above gilts could be achieved says the consultancy. Aon says that as providers have more time to adjust to the new regime, they are able to refine their investment strategies, and optimise their pricing, a trend which may continue.

The report comes days after the ICI pension fund executed a £750m pension risk transfer deal on more favourable terms shortly after the EU Referendum.

The Aon report says infrastructure is becoming an increasingly popular backing asset for annuities, and its attraction for insurers was enhanced by an easing of reserving requirements for many infrastructure projects from April 2016, supporting better pricing.

But the bulk annuity market has been relatively quiet in the first half of 2016, partly from providers grappling with Solvency II and an expectation from schemes of worse pricing than has emerged. Aon argues that providers still have business targets to meet for 2016 and several have substantial capacity for placements meaning that pricing opportunities should continue to emerge over the rest of the year. It argues that schemes starting a well-planned auction process over the summer, should have time to catch these opportunities before the markets become less liquid as we enter December.

An Aon spokesperson says: “Bulk annuity providers themselves invest materially on the bond markets, and so low yields do increase annuity pricing in absolute terms. However providers also increasingly invest in alternative illiquid assets that generate income, such as commercial property loans, infrastructure debt and mortgages.

“Some of these illiquid assets deliver yields that are substantially uncorrelated with bonds, with equity release mortgages being a key current example. They hence carry a yield that looks particularly attractive at a time of low bond yields, such as the current situation, enhancing the value of a trade from other matching assets to an annuity.”