mast image

Impact Investing

IPE special report May 2018

Sections

Half of UK schemes set to insure risk as market momentum continues

Related Categories

Close to half of UK pension funds are set to undertake an insurance contract covering liabilities within the next five years as the solutions market’s growth continues apace.

Two-thirds of pension funds said they would incorporate a bulk annuity deal or longevity insurance into their long-term plans, as 36% aim for self-sufficiency using a buy-in contract.

A survey of 40 UK pension funds with around £200bn (€270bn) in liabilities found 11% were aiming for a full buyout, where pension funds transfer all liabilities and assets to an insurer.

Some 17% aim for self-sufficiency using a longevity insurance contract, while 28% have no intention of using insurance products in their long-term plans.

As the UK bulk annuity market topped a record £12bn in 2014, the survey, published by insurer Legal & General (L&G), found 67% of those schemes looking to use a longevity contract would do so within five years.

In comparison, 53% of schemes planning to use a bulk annuity contract said they would operate on a much longer time-horizon of more than five years, while one-third of schemes are thinking more than 10 years down the road.

Despite the significant growth seen in pension scheme insurance products, of the 64% set to enter the market, more than a half have yet to speak with a provider, as one-fifth received a quote and decided not to proceed.

Last year saw record deals in all three insurance products as the ICI Pension Fund secured a £3.6bn buy-in, TRW Pension Scheme arranged a £2.5bn buyout and the BT Pension Scheme transferred £16bn of longevity risk to Prudential Insurance Company of America.

L&G estimated £1trn of UK pension liabilities would be available for potential insurance products as the bulk annuity market undergoes expansion following on from the Budget impact on the individual annuities market.

Tom Ground, head of bulk annuities and longevity insurance at L&G, said: “The increased demand for insurance de-risking from the UK’s largest pension schemes is clearly evidenced by the transactions completed [in 2014].

“Larger schemes have historically paved the way in the market, particularly on investment strategies, with similar approaches then being adopted across the rest of the market.”

The survey also found 67% of pension funds had already implemented a liability-driven investment (LDI) strategy, with an additional 20% looking to do so within the next five years.

Despite this, pension funds identified multi-asset strategies as the main area of growth within the next 10 years, followed by government bonds and LDI.

Emma Watkins, partner at consultancy LCP, said while the report demonstrated the appetite for insurance contracts among UK pension funds, capacity was the issue.

LCP analysis showed that, if half of the pensions reportedly interested in securing a bulk annuity deal in five years insured half their liabilities, insurers would need to provide around £25bn of capacity a year.

“This represents a significant increase from 2014, which saw a record £12bn bulk annuity premium written,” Watkins added.

KPMG previously reported it expected the bulk annuity market to reach £20bn a year by 2020, as insurers increase longevity exposure in the wake of a reduction in the individual annuity market.

In the aftermath of last year’s Budget, IPE reported that two insurers expected to increase writing capacity, with the removal of compulsory annuitisation forcing some providers into dramatic business model changes.

L&G’s research comes as the ScottishPower Pension Scheme announced a £2bn longevity risk contract with Abbey Life, a UK insurer.

Read Taha Lokhandwala’s analysis of the UK bulk annuity market in the aftermath of the Budget

Read about LCP’s study on the pricing power balance between UK pension funds and longevity insurance and bulk annuity providers

Have your say

You must sign in to make a comment

IPE QUEST

Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2435

    Asset class: CLOs.
    Asset region: Global.
    Size: USD 50m.
    Closing date: 2018-05-22.

  • QN-2436

    Asset class: Real Estate - Core Open-ended Real Estate Equity Fund (non-listed).
    Asset region: Asia Pacific.
    Size: Approx. CHF 70-100m per investment.
    Closing date: 2018-05-25.

  • QN-2438

    Asset class: High Yield Bonds.
    Asset region: US.
    Size: USD 300 million.
    Closing date: 2018-05-25.

Begin Your Search Here