Annuity changes prompt record derisking activity

Derisking of £10bn a year will become the “new normal” as the budget pensions freedoms drive buy-in and buy-out activity to record levels says LCP.

The firm’s seventh annual report on the insurance de-risking market estimates that for the first time ever, the value of buy-ins and buy-outs written in 2014 will pass £10bn, and predicts record insurer capacity and continued competitive pricing will ensure 2015 activity matches or even overtakes this year’s level.

LCP says the Chancellor’s Budget announcement has fundamentally changed how insurers approach the UK pensions market, freeing up capacity from individual annuities to support competitive pricing for the buy-in and buy-out market. The report shows buy-in and buy-out volumes have doubled within 2 years, with larger schemes now having a genuine choice of buy-in or longevity swap as demonstrated by the buy-in transactions undertaken by the ICI and Total pension plans, insuring over £5bn pensioner liabilities in aggregate.

The report says £22bn of liabilities have been hedged using trustee or sponsor-owned insurance companies that transact direct with reinsurers.

It says 20 per cent of FTSE 100 companies with UK pension plans have now completed transactions.

LCP partner and report co-author Clive Wellsteed says: “Our report shows that 2014 has been a ground-breaking year for the insurance de-risking market.  This is a welcome development for members of defined benefit plans, as sponsors and trustees take steps to improve security by moving pension promises away from corporate balance sheets to insurance companies, which provide a secure long-term environment.

“Next year will no doubt be another strong year in the insurance de-risking market. The transactions undertaken by the ICI and Total pension plans demonstrate that larger plans now have a genuine choice of a buy-in or longevity swap.  Smaller schemes will benefit from new entrants looking to build their track record and the continued streamlining of terms and process.”

LCP partner and report co-author Emma Watkins says: “As we look forward into 2015, record insurer capacity resulting from the Budget statement will help to maintain competitive pricing as demand trends upwards. The positive outlook is reinforced by strong reinsurer appetite for longevity risk, which is benefiting the pricing of buy-ins, buy-outs and longevity swaps.

“Competitive pricing is set to remain as insurers continue to be successful in sourcing attractive long-term investments.  Several potential new insurers are set to join the market.  This will further increase competition in 2015 providing extra confidence in the accuracy of our prediction that buy-in and buy-out volumes are on course to remain in excess of £10bn a year.”