A combination of low yields, decreased affordability and the implementation of capital requirement rules under Solvency II have led to a slower start in bulk annuity transactions this year compared to the last couple of years, said Lane Clark & Peacock.
An analysis by the consultant showed that a total of £2.7 billion ($3.5 billion) of buy-ins and buyouts have been completed by U.K. pension funds in the first six months of 2016, compared with £4.4 billion for the same period last year and almost £7 billion in the first half of 2014.
Deals have remained steady in the midsized section of the market, with five transactions between £100 million and £1 billion in the first half of this year, vs. seven in the same period in 2015 and six in the first half of 2014. However, there have not yet been any £1 billion-plus buy-in or buyout transactions so far this year.
The largest transaction so far this year was the £900 million buy-in by the £3 billion Aon Retirement Plan, Surrey, England, with Pension Insurance Corp. in May.
Solvency II, which placed new capital requirements on European insurers, became effective Jan. 1, and a number of pension funds brought forward transactions ahead of the introduction of the rules. “While this meant a record £5.4 billion of volumes in (the fourth quarter 2015,) it also accounts for reduced volumes in (first half of) 2016 compared to 2014 and 2015,” said Charlie Finch, partner at LCP, in a statement accompanying the analysis. “However, the underlying picture is one of a high level of activity and strong price competition.”
Besides the withdrawal of Prudential from the bulk annuity market, which cited “the onerous capital impact under the Solvency II regime” for its decision, “the new capital reserving regime under Solvency II has not dampened enthusiasm for pensioner buy-ins with six or seven insurers actively competing on recent transactions,” Mr. Finch said.
Falling yields have reduced affordability for full buyouts for all pension funds except those that are the best hedged. However, the fallout of the Brexit vote also “opened up attractive buy-in pricing opportunities for schemes that can move quickly,” Mr. Finch said, citing the ICI Pension Fund, London, saving £10 million in its £750 million buy-in with Legal & General, announced last month.
“Insurers are reporting a strong pipeline of cases, and we expect buy-in and buyout volumes for the second half of the year to materially exceed those in the first half,” Mr. Finch added.
