Insurance back-book deals could disrupt the annuities market in 2017 at times, Aon has warned.

In its latest UK Risk Settlement Update for 2017 Aon highlighted the Aegon back-book transactions won by Rothesay Life and L&G in 2016.

Therefore, although Aon has witnessed continued favourable annuity pricing in the early part of 2017, it suggested that schemes should start auctions soon if they want to be confident in completing the transaction this year.

It also said schemes should be prepared to show some patience if some insurers are distracted by other opportunities initially.

However, looking at the market Aon’s update stated: “Even with some early movers purchasing annuities in January, including the transactions we arranged for the Civil Aviation Authority and Smiths Group pension schemes, there remains substantial appetite and capacity for pricing new annuities, and favourable terms that are not yet being taken up by schemes.”

For example, for pensioner deals, pricing improved in summer 2016 and Aon has seen an increasing number of providers reach historically attractive pricing levels since then, particularly for annuities worth over £100M. This partly reflects some providers’ increasing desire to write larger transactions, which to a degree is an attempt to drive higher annual volume of bulk annuities. Good pricing since the turn of the year can also be attributed to spare capacity in the market across the seven providers actively competing for pensioner annuities.

In addition, Aon noted that we have been in a more favourable period for the spread between swaps and government bonds (Z-spreads) since the summer, which created more attractive pricing relative to gilts. Pricing is supported by a range of asset strategies and so has become less dependent on UK and US credit market conditions.

Providers are utilising infrastructure, equity release mortgages, commercial property and secured asset lending to obtain additional yield spreads and to access predictable income streams of particularly long durations. Insurers adopt asset strategies that are well suited to their annuity commitments and continually refine them to meet their needs.

In terms of full scheme buy-outs, the update said pricing is “highly competitive” now that insurance companies have built confidence in pricing non-pensioners under the new Solvency II regime and optimised their asset strategy accordingly.

For some employers, the improvement in yield levels – an improvement seen in the autumn that has been sustained so far into 2017 – coupled with the cheaper pound will make full buy-out a more viable proposition than in recent years.

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