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The Actuary The magazine of the Institute & Faculty of Actuaries

Bulk annuity market set for record 2018

The UK’s bulk annuity market is expected to grow strongly this year, with Willis Towers Watson (WLTW) predicting more than £15bn worth of deals over the course of 2018.

Pension schemes expected to hedge liabilities over 2018 ©Shutterstock
Pension schemes expected to hedge liabilities over 2018 ©Shutterstock

The firm also anticipates a large number of mega deals to be executed this year, with at least five bulk annuities surpassing the £1bn mark, significantly more than the largest deal of 2017, which was for £725m.

In addition, following Phoenix Life entering the market last year, it is expected that there will be at least one new entrant over 2018, while a return to large buyouts is also predicted.

“Rightfully, both domestic and overseas investors are seeing the potential in the growth and attractive returns on investment within the bulk annuity market,” WLTW senior director, Shelly Beard, said.

“We are currently seeing pension schemes taking advantage of attractive bulk annuity pricing, significant competition between insurers, and proactively using member option exercises to both give members flexibility and close buyout deficits.”

It is also expected that pension schemes will continue to de-risk throughout the year while taking advantage of the lowest ever longevity pricing.

WLTW said that longevity hedging pricing is now partially reflecting the higher mortality rates of recent years, with over £10bn of liabilities predicted to be hedged over the course of 2018.

“We’re helping several pension schemes for whom a longevity swap has minimal cost relative to their Technical Provisions longevity assumptions,” Beard said.

“While this assumption is due to be updated at the next valuation, the opportunity to remove the risk instead of improving the funding level is compelling for the respective trustees and the sponsors.”

WLTW also highlight how pension schemes investing in a buy-in are able to make significant gains relative to investing in gilts while also managing longevity risk.

“We are currently seeing the best pricing for buy-ins for a decade,” Beard continued. “All of this is being driven largely by insurers deriving a higher investment return through sourcing direct investments.

“Such investments include funding student housing, airport landing slots and wind farms, which provide a good match for pension payments.”

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