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UK pension changes to boost bulk annuity market, experts say

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Plans to end compulsory annuitisation for defined contribution (DC) pension plan holders in the UK, announced in last week’s Budget, could boost the bulk annuity market, according to pensions consultants.

If individual annuities business shrinks, insurers are likely to divert capital to pension fund buyouts, and if some members of defined benefit (DB) schemes switch to DC, sponsors may be encouraged to seek buyouts, consultants from Aon Hewitt and Mercer argued.

Dominic Grimley, principal consultant at Aon Hewitt, said: “Our view is that the changes outlined in the Budget will not have a material impact on the security available to bulk annuity policyholders given the regulatory protections that exist. 

“Depending on how insurers will presumably alter their business models – in light of a reduced demand for individual annuities – their appetite for bulk annuities may well increase, which would be positive for the competitiveness of this market.”

He said insurance companies had ring-fenced significant capital reserves for annuities, and that a fall in the scope for new business could even benefit policyholders in the very short term, as insurers would need less capital for allocation to new policies.

David Ellis, UK head of bulk pensions insurance at Mercer, said the Budget announcement would have two main effects: increased supply in the UK pension buyout market and increased demand from plan trustees and sponsors.

“Taken together, this suggests acceleration in the pace at which UK plan trustees and sponsors purchase insured annuities covering their defined benefit pension obligations,” he said. 

This could increase the UK pension buyout market by as much as 20%, he said. 

“We might even see one or more additional entrants into the UK pension buyout market, which would be welcome news for trustees and sponsors,” Ellis said. 

He said the apparent difference in the way DB and DC savers were treated could prompt many members of private sector DB plans to transfer benefits to a DC arrangement so they could access the funds immediately from April 2015.

This would reduce the burden on DB plan sponsors, giving some trustees and sponsors a stronger business case for buying annuities to cover the reduced amount of remaining pension obligations, he said.

Separately, consultancy Towers Watson said it expected individual UK bulk annuity deals to become larger, with the bulk annuity and longevity swap markets continuing to grow.

In its annual de-risking report, the firm also predicted that new longevity hedging structures would evolve, and medical underwriting become more mainstream.

It pointed out that 2014 had already seen the largest longevity swap so far with the £5bn (€6bn) Aviva Staff Pension Fund deal.

The survey of the main bulk annuity providers indicated the average size of transactions would get larger during 2013, Towers Watson said, with more deals worth more than £1bn.

Sadie Hayes, transaction specialist at the firm, said: “The longevity reinsurance market is currently very competitive, with an ever-increasing number of players.”

Reinsurers are becoming more confident with UK longevity risk and therefore considering larger deals, she said.

“This, combined with a significant improvement in solvency levels among most schemes in the last 12 months, is providing even the largest pension schemes a credible option to materially reduce risk,” she said.

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