mast image

Special Report

Impact investing

Sections

UK pension schemes should beware bulk annuity 'capacity crunch'

Related Categories

The bulk annuity market is poised to experience a “capacity crunch” in the medium-term, according to consultancy Hymans Robertson, which has pointed to a shortfall of at least £65bn (€76bn) in 10 years time, as growing demand from UK defined benefit (DB) schemes outstrips insurers’ supply. 

The consultancy forecast that annual demand for bulk annuity buy-ins from UK private sector DB schemes will grow threefold by 2026, to £350bn.

It added that the predicted demand will exceed the capacity in the market, at least over the medium-term.

James Mullins, head of buyout solutions at Hymans Robertson, said:

<

“To give a sense of the scale of the mismatch, if we were to assume a 5% increase in insurer capacity year-on-year, then in 10 years that would equate to £225bn of supply.”

This would amount to a £125bn shortfall.

“Even when taking a more optimistic year-on-year growth of 10% over the next ten years we’d still be looking at a £65 billion shortfall,” added Mullins.

Such a “capacity crunch” could arise despite “plenty of supply” at the moment, according to the consultancy.

This has implications for pricing, which is currently “keen”, it said.

“[W]hen we reach the point that demand to transact buy-ins outstrips supply from insurance companies, insurers will inevitably offer better pricing to the pension schemes that have already completed a buy-in,” said Mullins.

The consultancy’s findings are based on an analysis of all DB pension schemes sponsored by FTSE350 companies, which it then scaled up to cover all UK private sector DB schemes.

It said that DB pension schemes and insurance companies will look to buy gilts of more than £300bn over the next 10 years.

UK pension funds’ unwilligness to part with gilts was said to be behind the Bank of England recently failing to meet its buying target for long-dated government bonds as part of its quantitative easing (QE) programme. 

Hymans Robertson also surveyed all insurers active in the bulk annuity market as at the end of June 2016, asking them about their appetite and capacity for deals over the next 12 months.

This included Prudential, which Hymans Robertson noted has since confirmed that it will be withdrawing from the bulk annuity market.

This leaves seven insurers active in the market, although Hymans Robertson expects new entrants, not least because strong demand from pension schemes makes it “an attractive source of business for insurers”.

The findings were presented in the consultancy’s first annual risk transfer report.

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-2548

    Asset class: Fixed Income, Emerging Market Debt Hard Currency (Active).
    Asset region: Emerging Markets.
    Size: CHF 300-400m.
    Closing date: 2019-07-30.

  • QN-2549

    Asset class: Fixed Income, Emerging Market Debt Hard Currency (Passive or Passive Enhanced).
    Asset region: Emerging Markets.
    Size: CHF 300-700m.
    Closing date: 2019-07-30.

  • QN-2550

    Asset class: Fixed Income, Emerging Market Debt Local Currency (Active).
    Asset region: Emerging Markets.
    Size: CHF 250-350m.
    Closing date: 2019-07-31.

  • QN-2551

    Asset class: Fixed Income, Emerging Market Debt Local Currency (Passive or Passive Enhanced).
    Asset region: Emerging Markets.
    Size: CHF 250-350m.
    Closing date: 2019-07-31.

  • QN-2552

    Asset class: Fixed Income, High Yield (Active).
    Asset region: High Yield (US).
    Size: CHF 500-600m.
    Closing date: 2019-07-29.

  • QN-2553

    Asset class: Fixed Income, High Yield (Passive or Passive Enhanced).
    Asset region: High Yield (US).
    Size: CHF 500-1'100m.
    Closing date: 2019-07-29.

  • QN-2554

    Asset class: Global Real Estate (Equity, unlisted Funds).
    Asset region: World (ex-Switzerland).
    Size: CHF 200 mn (potential for further growth).
    Closing date: 2019-08-07.

  • QN-2555

    Asset class: Real Estate.
    Asset region: European.
    Size: EUR 50 - 100 million.
    Closing date: 2019-07-22.

  • QN-2556

    Asset class: FX Hedging.
    Asset region: Global.
    Size: Mandate size of CHF 1.5 bn.
    Closing date: 2019-08-09.

  • QN-2557

    Asset class: All/large Cap Equities.
    Asset region: China A-shares.
    Size: Unit linked platform (0m USD in initial investment).
    Closing date: 2019-08-01.

Begin Your Search Here
<