Eurozone crisis creating problems and opportunities for bulk annuity market

Bulk annuity and longevity swap providers believe the Eurozone crisis has the potential to close off opportunities for pension schemes looking to transfer risk to third parties, but also to create new ones, according to a report from Towers Watson.

Providers say schemes with bigger deficits will usually have to retain some risks for longer.  However, strong demand for liquid assets is allowing trustees holding gilts to sell them and buy annuities at lower cost.

The report predicts windows of opportunity as volatile market conditions cause providers’ prices and schemes’ asset values to move around. But there is also more danger that prices will change before a transaction is complete, it says. Providers could also increase prices if they start expecting more defaults on the assets they hold to back annuity commitments.

The report is published at a time when a bumper year has been followed by a relatively slow start to 2012. Bulk annuities and longevity swaps covering £12 billion of liabilities were signed during 2011. 

Aviva, Deutsche Bank, Lucida, MetLife, Pension Insurance Corporation, Rothesay Life and Swiss Re contributed to the report, which shows providers expecting that the coming years will see increased use of solutions involving deferred premiums, partial risk transfers or guaranteed pricing. 

Ben Stone, senior consultant at Towers Watson, says: “The latest blow to scheme funding levels has made full buyout a more distant prospect for many schemes.  However, this cloud has a silver lining: buying in annuity policies to cover existing pensioners can be more affordable for those who have seen the value of their gilts outpace the rise in annuity prices.  Market turbulence will open doors then quickly slam them shut, so schemes need to work with providers to accelerate the completion of transactions and lock down the price in the run up to the trading day.”

“In 2011, there was something of an ’end of year sale’ as providers cut prices to hit new business targets.  Whether it is economic conditions or unfulfilled appetite from providers that makes pricing attractive in future, the schemes that benefit will be those who have cleaned their data and established effective decision-making structures.  Sometimes, providers with limited capacity may have to choose which schemes to engage with, and it is those who are transaction-ready who will be taken seriously.”