Attractive pricing is driving a surge of interest in the mid-size pension buy-in market – with insurers aggressively cutting prices to win new business, according to Willis Towers Watson.

The consultancy firm said it had completed two buy-ins in April, each covering £100m (€118.4m) of liabilities, and was advising on a further five deals covering more than £1.5bn of liabilities which they expected to close over the coming weeks.

Ian Aley, head of transactions at Willis Towers Watson, said the high level of competition among insurers trying to win business was “great news” for pension schemes.

“One notable feature of the current market is the level of competition for deals between £100m and £300m of liabilities – we are seeing seven insurers quoting on many deals, leading to significant competitive tension as the insurers fight to win deals,” he said.

The bulk annuity and longevity swap markets had a “relatively modest” start to 2017, Aley said, with just over £1bn of transactions publicly announced at the end of March, despite market commentators predicting a record breaking year. However, he said the figure did not fully capture the level of activity in the market.

“The buy-in market is currently very active, perhaps the busiest I have ever known it to be,” he added. “We have observed pricing that has consistently been at levels last seen in the financial crisis of 2008-09, making the case for pensioner buy-ins highly compelling relative to holding a portfolio of gilts and credit.”

There were two key drivers for this focus on the mid-size market, Aley said. Reinsurers had recently started to reflect the increased levels of mortality seen in 2015 and 2016 into their pricing. As a result, the cost of longevity hedging for buy-in providers had fallen, feeding straight through to pricing. 

Secondly, Aley noted there was also a limited supply of suitable high-yielding assets to facilitate attractive pricing for very large bulk annuities, leading to insurers focusing on the mid-size market.

Insurers were also enjoying more investment flexibility under Solvency II, which came into effect from 1 January 2016, allowing them to source alternatives to corporate bonds, such as ‘secure income assets’ and lifetime mortgages.

In its most recent monthly newsletter, Willis Towers Watson said: “Both of these asset classes can provide a good match to the liabilities of a pension scheme via their secured cash-flow stream, and typically provide a higher yield than corporate bonds due to their illiquidity – a premium the insurer is able to accept given the long-term investment they are seeking.”