As Rothesay Life seeks a new owner, Jonathan Williams examines if consolidation or interest from large overseas markets poses a bigger threat to UK de-risking deals.
Over the summer, the UK de-risking market has seen significant deal activity, as well as a number of important changes. Lucida, closed to new business since late 2012, was sold to rival Legal & General, while Goldman Sachs announced its intention to sell Rothesay Life, which itself acquired Paternoster less than two years ago.
Ian Aley, senior consultant at Towers Watson, questions whether the US investment bank will be able to find a new owner for Rothesay. “It is not certain whether Goldman Sachs will be able to find a trade buyer,” he says, “though it is possible US or European insurers could be interested in entering the UK market.”
Consensus is nonetheless that the market will continue to function well, even with a potential reduction in providers. But the larger threat comes, not from closures and sales, but the potential for interest from the significantly larger defined benefit market in North America.
In the wake of a $7.5bn (€5.8bn) bulk annuity deal by US telecoms giant Verizon, Paul Kitson, pensions partner at PwC in London, believes capacity and resource shortages could hurt the market. “There are deals in the US and Canada that, in one single transaction, will be the entire appetite the whole market might have had in the UK in one or two years,” he says.
The Verizon deal would be a case in point, as, across eight UK providers and 169 deals, bulk annuity transfers only came to £4.4bn (€5.4bn), according to Towers Watson. “The sheer size of [the North American deals] means they could take a while to digest for reinsurers, which keeps them out of the UK market,” Kitson says.
“As well as the sheer size, it is actually just a ‘number of transactions’ element,” he adds, explaining that most reinsurance companies will have limited staff available to work on pricing any reinsurance deals.
Kitson says the lack of manpower to price reinsurance deals has already led some reinsurers to forego bidding on pension risk blocs that insurers have been looking to protect.
“In some sense,” says Kitson, “even if we do only see smaller US and Canadian deals, or other transactions being priced by reinsurers, that might mean they aren’t going to price a UK transaction because they are too busy on those other things, even though they are not the mega-deals we’ve seen so far.”
He notes that, despite the absence of the predicted ‘explosion’ in de-risking deals in the UK, the macroeconomic reasons behind companies wanting to transfer risk remain in place. “We certainly still see, predict and expect a continuation and an increase in these types of transactions.”
The question for him would be whether the capacity problems would end up increasing prices, driving UK funds away from straightforward longevity swaps or bulk annuity deals towards more flexible solutions.
“There has been a lot of talk about index-based swaps, or shorter-duration swaps that provide some kind of directional protection for the way longevity is trending,” he says, “rather than taking out precisely the risk associated with a specific pension fund.”
However, he notes that, regardless of the increase in prices or the capacity crunch facing reinsurers, the problems will not “profoundly” affect smaller UK deals “any time soon”.
“It’s definitely the case, and it remains the case despite people like Legal & General’s appetite to take longevity risk on balance sheet themselves,” he says.
Tom Ground, L&G’s head of business development in the bulk annuity division, confirmed early last year his company’s ability and desire to keep pension deal longevity on the balance sheet until it was ready to reinsure, keeping the potential capacity crunch at bay for all but the large UK deals.