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Risk Management

U.K. bulk annuity market set for record year

The U.K.'s bulk annuity market could hit a record £30 billion ($39 billion) this year, says consultant Aon.

The firm said the pension risk transfer market is on track to hit that volume in 2018 — a prediction it made last December.

About £20 billion of business has already been transacted, with a number of large deals including a £1.3 billion buy-in by the Siemens Benefits Scheme, Poole, England, with Pension Insurance Corp. in July.

Also in July, the PA Pension Scheme, London, completed the largest buyout deal so far for the year, at £850 million with Pension Insurance Corp.

Aon said in a news release that it has continued to see attractive pricing and favorable market conditions when it comes to annuities offered at a yield "materially in excess of gilt values." However, Aon warned there is a possibility of prices increasing should high demand continue through to the fall.

"We remain confident that the market is on track to hit our forecast," said John Baines, partner in Aon's risk settlement team, in the release. "The first six months of 2018 was the busiest ever first half of the year in the bulk annuity market, and was also the most fruitful in terms of volume of business placed."

Mr. Baines said the signs are good for continued interest and demand, with an expectation that "the structure and size of deals (will break) new barriers during 2018."

Aon also expects to see pension funds' focus sharpen on moving to full risk transfers from currently insuring only a portion of portfolios.

However, capacity constraint concerns remain, although access to capital and the willingness of insurers to take on longevity risk is not yet a problem.

"Even so, access to high-yielding illiquid assets to drive competitive pricing ... as well as experienced resource on the pricing teams will remain key issues," he said. "In addition, the insurers are also working through the implications of the recent consultation issued by the Prudential Regulatory Authority in relation to equity release assets and the associated capital reserves. Adding all this together, we are seeing signs of the insurers becoming a little more wary about deciding to quote on a new auction and an increasing degree of selectiveness on more speculative or indicative quotations," warned Mr. Baines.

He added that means insurers can be "relatively choosy," and said pension funds need to be well prepared.