UK bulk annuity transactions could reach a record level of £30bn in 2018, Aon has stated.

Aon explained that for the fourth year in a row transactions are likely to exceed £10bn in 2017, regardless of the fact that there wasn’t any single transaction exceeding a billion for the first time in five years. This reflects a continued increase in the core growth of the market, Aon said.

Comparatively, Aon expects markets to be busy throughout 2018. Aon’s risk settlement team partner John Baines observed that 2018 could bring the re-emergence of “mega deals” with a “very strong pipeline of £1bn deals already in place” in relation to pension schemes and insurer back-books.

Aon has suggested that with the increased level of activity, some schemes may need to be patient, waiting for “prime insurer appetite and financial conditions” before they engage in any de-risking activity.

Baines noted that the increased bulk annuity market activity can be attributed to two factors. The first being the improved financial position of scheme that has led to an increased focus on de-risking for both trustees and sponsors. “In particular… an increase in sponsors using bulk annuities to make a clear statement to shareholders that pension risk is under control.”

The second factor, Baines said, is the fact that the pricing of bulk annuities is at a nine year low in comparison to other low risk assets.

“This has been driven by increasing innovation within insurers’ investment strategies, greater competition, and a reflection of the latest longevity trends, which show life expectancy expectations are lower than previously predicted and which are now largely factored into reinsurance pricing,” he explained.

Baines concluded: “Given the good pricing available, the time looks to be ripe for pension schemes aiming to acquire a bulk annuity. However, schemes – now more than ever - need to be serious when they approach the market. Schemes need to be able to align and articulate the strategies of all the key stakeholders - the trustees, sponsor and members. Schemes need to be clear about which benefits they are insuring, and of the structure of deal from the outset.

“In the past, a speculative approach to test the market has been tolerated, but we expect such approaches to result in disappointment in 2018. Insurers are increasingly focusing their resources on those that are most likely to transact.”

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