U.K. pension funds are expected to insure £30 billion ($36.8 billion) of liabilities in 2017, bringing risk transfer transactions back to pre-Brexit levels, show projections from Willis Towers Watson.
In 2016, the value of deals — buyouts, buy-ins and longevity swaps — was £11 billion, compared with £18 billion in 2015 and £39 billion in 2014.
Liabilities hedged through bulk annuity transactions were down 26% to £9 billion in 2016 from £12.3 billion a year earlier. Longevity swaps totaled £2 billion, down 66% over the same period.
The 2016 referendum resulting in the decision to leave the European Union by the U.K. caused uncertainty and headwinds across the market, which combined with Solvency II slowed down the pace of risk transfer deals.
According to the consultant, an overall increase in the regularity and volume of longevity risk being passed into the reinsurance market allowed smaller pension funds to be more active in the longevity hedging market in 2016, a trend, which is expected to continue into 2017. Larger deals that insurers have in the pipeline are expected to be completed as well, according to Willis Towers Watson.
“Contracts for smaller plans looking to hedge against longevity are now easier to implement, as their structure becomes more streamlined over time. Alongside greater access for all to big scheme pricing, this is really a significant trend to watch over the coming year, as prohibitive cost barriers start to be eroded,” said Shelly Beard, director on Willis Towers Watson's derisking team, said in a news release.
“In the second half of 2015 and 2016, the longevity reinsurance market was dominated by insurers transferring the longevity risk associated with their new and existing bulk annuities. In 2017, we expect reinsurers' focus to return to the pensions market and for competitive pricing to be available,” Ms. Beard said.
Another continuing trend will be follow-up buy-in deals, where plans conduct buy-ins in tranches. Pension funds that undertook buy-in transactions over the past few years are expected to return to the market as they look to further derisk their liabilities, Willis Towers Watson said.