Summer discounts see bulk annuity affordability surge

A summertime change in insurers’ attitudes to pricing bulk annuities has led to a 10 per cent year-on-year cut in the cost of securing defined benefit scheme liabilites says Aon.

The consultancy says a combination of increased competition from insurers, greater flexibility in insurers’ investment matching strategies and shorter longevity assumptions have combined to create an environment where bulk annuity prices have been secured at considerably lower levels than those stated on insurers’ pricing feeds.

Aon partner John Baines says the insurer has had to recalibrate its assumptions for the affordability of buyout deals because of increasing levels of price undercutting by insurers between May and July. Bringing these factors into account has led to a significant uptick on the consultancy’s buyout affordability index at the end of July 2017.

Aon says insurers are now using a range of high yielding illiquid assets – which are not always attainable for individual pension schemes – to back their annuities.

Baines says: “Pricing feeds from insurers are increasingly not reflective of the prices that can be negotiated.

“Although insurers generally have different preferences for the size and maturity of liabilities taken on, most auctions currently attract substantial competitive pressure. There are more insurers in the market now and that is creating competitive tension. We are also starting to see revised longevity data – which has shown a slower rate of increase in lifespan than previously predicted – feeding into prices.

“The step change shown in July 2017 reflects impressive final auction prices achieved over the summer. A similar positive change has been seen for pricing for non-pensioner members, making full scheme buy-out more attainable.”