The bulk annuity market has continued to drop, with a 32 per cent reduction in the value of deals done in the second quarter of 2009 in comparison to the previous quarter, says Aon Consulting.

The employee risk and benefits management firm's Q2 bulk annuity survey, based on information provided by leading insurers, shows that the value of business placed in this quarter was £607million, but in Q1 hit £888million. This, the company says, represents the fourth quarter running that business has declined.

This drop can be largely attributed to the lack of big deals, with the largest during Q2 being the second tranche of Dairy Crest pensioners at £170million.

"Given the continuing volatility in investment markets, it is arguably not surprising that the level of business written has dropped again this quarter," explained Paul Belok, principal and actuary at Aon Consulting. "Despite this, activity remains well above what was seen before the explosion of interest that occurred at the end of 2007, and we have seen considerable resilience in the number of cases transacting up to about £100million. We are also aware of larger deals that are under serious consideration that could well conclude prior to year end, which suggests that the market could be close to picking up once again."
Meanwhile, HamishWilson has warned that higher annuity prices will be to the detriment of the buyout market, pushing them further out of reach for companies. Solvency II proposals, HamishWilson said, will push up annuity charges because insurance companies will be required to hold greater capital reserves under the rules. The actuaries and consultants firm said this will ultimately put a greater focus on other ways of de-risking.

"The fact of the matter is buyouts and buy-ins are not an option for most schemes as they simply cannot afford them," said Hamish Wilson, partner. "Any increase in annuity prices will push them even further out of grasp. What schemes will now have to do is examine alternative options for de-risking.

"It will also mean lower benefits for all those who are forced to buy out their benefits at retirement - DC members and the self-employed - thereby adding further tension between the private (now largely DC) and public (still largely DB) sectors."

Belok, however, said Aon expects to see a pick up in the number of deals, in particular buy-ins, this year due to early signs of stabilisation in the investment markets, a continuing opportunity to secure pensioner liabilities close to or below the funding reserve, an increased focus on scheme closure and a pick-up in M&A activity.

"The economic downturn is also inevitably leading to an increase in insolvency situations. Whilst some of these will result in the scheme assets and liabilities transferring to the Pension Protection Fund, those with better funded schemes will ultimately end up in the bulk annuity market (although the complexity of scheme wind-ups means that this effect will take some time to feed through)."

Belok added that larger schemes looking to de-risk would be well positioned to consider alternative approaches, such as longevity hedges.

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