Buyout now while stocks last
Pension longevity transfer, whether through full insurance buyouts, bulk annuities or longevity swaps, is still largely a UK business.
A few years ago, pension buyouts were first touted as the ultimate goal of a UK DB plan sponsor, and consultants recommended their clients set their funds on a ‘journey plan to settlement’. A host of monoline competitors emerged to compete with the likes of Legal & General and Prudential and the business began to take off from about 2006.
And longevity risk transfers of all forms have steadily increased, peaking at £12bn in 2011, even if pure buyouts and buy-ins, as bulk annuities are termed, have hovered in the £3-5bn range yearly since 2009, after a 2008 peak of about £8bn. Current activity is healthy, with a couple of multi-billion deals expected to complete this year. Some £4.5bn of buyout and buy-in activity took place in 2012.
But, to date, only some £50bn (€59bn or 5%) of the total £1trn of UK pension liability risk has been transferred to external parties.
Furthermore, some of the pension insurers have consolidated. Legal & General has swallowed up Lucida, and Goldman Sachs wants to dispose of Rothsay Life, which had itself acquired Paternoster.
Still, Hymans Robertson believes new entrants may yet add competition to the pension insurance market, and thinks that UK longevity risk transfers may double in volume to reach £100bn by 2017.
Fundamentally, pricing has become more competitive, and innovations such as deferred premium buyouts may assist in making buyouts more affordable, as we report in this month’s UK pensions report. Longevity indices have been under discussion for a while and further development might also help boost the market, as might shorter-duration longevity swaps.
According to a recent Bank of International Settlements report, total global annuity and pension longevity risk exposure is some $15-25trn (€11-19trn), and each additional year of life expectancy adds 3-4% to present liabilities.
As markets develop, risk transfer is also slowly becoming international: already two large US transactions in 2012 (the $26bn buyout between GM and Prudential and a $7bn buyout between Verizon and Prudential) and one in the Netherlands (a €12bn longevity swap between Aegon and Deutsche Bank) added some €37bn to the pool of risk transfers to date.
Added to the healthy pipeline in the UK, this means one or two large transactions a year could eat up a large chunk of insurance capacity as insurers and reinsurers digest deals, as PWC notes in our analysis in this issue, which could knock trustees’ prudent intentions off course.