Massive surge in derisking predicted to continue

Insurers looking to replace lost annuity income and reinsurers’ appetite for longevity risk have made 2014 a record year for DB derisking, with £38bn of liabilities insured, according to figures from Hymans Robertson. 

The firm says insurance companies now look after the risk associated with £110billion of pension scheme liabilities

Hymans says a record breaking £38bn of pension scheme liabilities were insured during 2014, more than double the previous record, set in 2013, of £16.4bn.

Insurance companies now look after the risk associated with £110bn of pension scheme liabilities – equivalent to 6.5 per cent of all defined benefit pension scheme liabilities.

Hymans says it expects this trend to accelerate, with close to £15bn bulk annuity transactions and growth in the longevity swap market, which means that individuals will increasingly look to insurance companies to provide the security for their pension.

The medically underwritten bulk annuity market also took off in 2014, with over £500m of deals completed in Q4 2014 alone, representing over 10 per cent of all bulk annuity transactions in that quarter.

Hymans Robertson head of buy-out solutions James Mullins says: “2014 was a bumper year for the risk transfer market, with total deals exceeding £38bn. This significant uptake in deals has been driven by three factors.  First, insurance companies are keener than ever to complete bulk annuity deals to replace lost revenue from individual annuity sales, due to the pension freedoms announced in last year’s Budget.  Second, we continue to see strong appetite from global reinsurance companies to take on UK longevity risk. This means the cost of removing life expectancy risk via a longevity swap or bulk annuity remains at attractive levels.  And finally, the continued volatility in pension schemes’ financial positions means that they are keener than ever to transfer risks to insurance companies.

“The majority of the deals, by value, across the year were driven by longevity swaps and large bulk annuity deals, areas that we expect to see continued growth in 2015.  However, the end of 2014 also saw an upsurge in more niche buy-in deals. Over £500m worth of medically underwritten deals took place in the fourth quarter, which was over 10 per cent of all bulk annuity transactions in Q4 2014. This is an area that we expect to see particular growth in 2015, with attractive pricing putting deals over 5 per cent cheaper than traditional buy-in deals.

“The decision on when to de-risk is something that is moving higher up the agenda for pension scheme managers and trustees. Last year, our research found that 30 per cent of trustees believe having a clear understanding of scheme risks and when to de-risk is the biggest single challenge they face.  The significant competition from insurance and reinsurance companies means that pension schemes who are broking the market now will be pleasantly surprised with the attractive current pricing of both buy-ins and longevity swaps.”

“Hymans Robertson therefore expects to see close to £15bn of bulk annuity transactions during 2015, including around £1bn from medically underwritten buy-ins.  In addition, we expect that the longevity swap market will continue to grow at pace.”