Longevity hedging to hit £20bn this year – WTW

Risk - thumbnailIncreased competition in pensions de-risking means more small-sized deals will happen in 2016, predicts Willis Towers Watson.

The consultancy predicts de-risking will continue to increase this year after the introduction of Solvency II.

Willis Towers Watson’s 2016 De-risking Report says predicts the number of company pension schemes entering into longevity swaps and bulk-annuity deals in 2016 will increase due to schemes recognising the importance of managing the longevity risk in their portfolio.

More than £10bn of liabilities were transferred to the insurance market through either buy-ins or buy-outs, much of which came from pension schemes that had transacted in this market previously says the report. Willis Towers Watson predicts overall deal values for longevity hedging could hit £20 billion in 2016, which would be the second largest year on record.

The consultancy predicts ‘top slicing’ – where pension schemes separately package up small groups of individuals with high liabilities in order to remove concentrated longevity risk – will increase as schemes improve their understanding of the areas where they have the highest concentration of risk. The longevity risk for these groups is typically removed from the overall scheme through the purchase of a medically underwritten bulk annuity. Medical underwriting is increasingly being used for these deals due highly attractive pricing in the current market.

Willis Towers Watson senior de-risking consultant Shelly Beard says: “There are £2 trillion of UK defined benefit (DB) liabilities and to date only £150 billion of these have hedged longevity risk. This is an area that continues to grow rapidly both in terms of the size and volume of annuity transactions and longevity swaps, with more innovative ways to access this market being developed. With more and more pension schemes starting to think about a de-risking journey and how to manage their risks, the activity in this market is only expected to increase as longevity risk moves higher up the agenda for pension schemes.”

“There has been a wide range in the transaction pricing so far this year, which we believe is partly driven by insurers price-testing their new positions under Solvency II.  However, general pricing levels remain strong and the recent widening of corporate bond spreads has increased affordability for those schemes which have set a price target relative to gilts.”

The report notes that the new Solvency II capital requirements mean that bulk-annuity providers will be looking to hedge more longevity risk themselves using the reinsurance market, which could mean that pension schemes find it more difficult to get traction when reinsurers have limited resources.

Beard says: “Reinsurers are aware of the potential capacity constraints and are continuing to build their teams to cope. While we may see bottlenecks in certain areas, we do not expect it to have a major impact on the market and schemes that go to market with clear objectives will continue to achieve good outcomes.”