2020 to be second busiest year for bulk annuities despite Covid-19

The bulk annuity market is on track to complete between £25bn and £30bn of transactions in 2020, making it the second busiest year on record for the bulk annuity market, according to research by Barnett Waddingham.

The report, Bulk annuities: Delivering de-risking in challenging times, found that the market has demonstrated “remarkable resilience” in the face of the pandemic, with around £15bn of longevity swaps also expected in the year.

In particular, it noted that £12.6bn of buy-ins and buyouts were completed during the first half of the year, which, whilst not quite matching the 2019 record, was the second busiest first half year ever, emphasising that this was particularly notable against the current landscape.

Indeed, the firm found that a full range of transactions, including full and partial transactions across both small and large schemes, have been completed amid the pandemic, as market volatility provided attractive pricing opportunities.

It has also predicted that the competitive pricing levels relative to gilts will persist into 2021, supported by “strong underlying commercial appetite” of providers.

Furthermore, it stated that the recent clarity on retail price index (RPI) reforms should also help allow insurers to refine their hedging and reserving strategies, which may result in some adjustments to how these liabilities are priced.

However, it also found that whilst 2019 had been a “very strong year” for longevity improvements, 2020 has been a “much bleaker picture”, with an unprecedented level of negative improvements in UK mortality rates.

It noted that although the Continuous Mortality Investigation has proposed that no “weight” is placed on the 2020 death data due to its exceptional nature, the impact could be "notable", depending on how trustees and insurers exercise their judgments.

Adding to this, it also clarified that although the potential impacts of Covd-19 on future mortality are likely to take some time to emerge, it has highlighted the long-term uncertainty of longevity risk for schemes, and the importance of understanding this.

Commenting on the report, Barnet Waddingham partner and head of bulk annuity consulting, Gavin Markham, added: “2020 has been an exceptional year and not one which people could have anticipated.

“The bulk annuity market has clearly demonstrated its resilience in challenging times, and is on course to become the second highest year on record.

“The market has continued to offer schemes, across a range of sizes, with attractive opportunities to de-risk.

“The pandemic and associated economic crisis, alongside The Pensions Regulator’s existing desire for pension schemes to put in place long-term plans, may lead to a heightened focus on schemes’ long-term objectives and effective risk management.

“This in turn can provide an effective decision-making framework for transaction”.

He added: “In looking to achieve the best transaction outcome in this busy market, the messaging to pension schemes remains the same.

“Be proactive and engage with the market in a well-prepared and considered manner.

"Clear objectives, demonstrating transaction readiness and having a good understanding of the insurers’ perspective and operations will be key in maximising insurer engagement and being an attractive proposition.”

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