Deal sizes in the UK bulk annuity and longevity swap markets will continue to grow, Towers Watson has said.
In its annual de-risking report the actuarial firm said new structures for longevity hedging would evolve and medical underwriting would become more mainstream, while market capacity dries up.
The largest longevity swap recorded in its report was the £5bn Aviva Staff Pension Fund transaction. Towers Watson also predicted that the record £1.5bn bulk annuity transactions carried out by the EMI Group Pension Fund in 2013 would be surpassed this year.
Towers Watson's analysis of the main bulk annuity providers confirmed that the average size of transactions is expected to grow during 2014, meaning there will be more transactions in excess of £1bn.
The firm's transaction specialist Sadie Hayes said the expected surge in transaction sizes was driven by supply and demand factors.
Most of the longevity risk from such large transactions would ultimately end up being reinsured, she added.
'The longevity reinsurance market is currently very competitive, with an ever-increasing number of players and the growing size of transactions that the reinsurers will consider as they become more confident with UK longevity risk,' Hayes said.
'This, combined with a significant improvement in solvency levels among most schemes in the last 12 months, is providing even the largest pension schemes a credible option to materially reduce risk.'
The firm's report also found that the market for competition could be an issue for pension schemes wanting to transact this year.
Hayes said that, apart from pension scheme transactions using up capacity, insurers would also become more selective about the opportunities they choose to quote on. She noted that it would be those pension schemes that could demonstrate their commitment to a transaction that would get attention and the best prices.
The 2014 Towers Watson de-risking report also highlighted that medically underwritten bulk annuities were becoming more important to pension schemes.
Will Griffiths, medical underwriting specialist at the firm, said there had been significant growth in the 'impaired' or 'enhanced' individual annuity market in recent years.
'Now these insurers were bringing their underwriting expertise to the bulk annuity market,' he said. 'The key difference between these markets is that the members do not have the potential to gain from supplying details of their health for a bulk annuity.'
'In the individual market, disclosing their health conditions may mean that their pension pot can buy a bigger annual income; in the bulk annuity market it simply affects the amount the scheme pays to secure the same benefit for the member. However, this does not seem to have been a barrier in recent transactions.'
Griffith noted that the market could currently offer a significant opportunity for schemes with liabilities of less than £50m. 'We also believe that the difference that medical underwriting makes to price means that some schemes will be a lot closer to settlement than they think.'
