Bulk annuity pricing sees biggest disparity in over a decade - Aon

The bulk annuity market has seen the widest range of pricing in over a decade due to ongoing market volatility, Aon has said.

Analysis by the firm found that pricing over the last two months had shown high levels of disparity, ranging by as much as 10 per cent between best and worst pricing on individual transactions.

Aon risk settlement team partner, Mike Edwards, explained that this disparity is more than double what would be expected “in a more typical market situation”.

“In addition to that,” he added, “the pricing levels from individual insurers have been highly variable from transaction to transaction.”

The firm explained that the widening gap in pricing reflects a number of current market factors, such as the variety of insurer pricing investment strategies, and the proportion they invest in corporate bonds in particular.

Sourcing capability of individual insurers to buy corporate bonds at prevailing yields, considering reductions in market liquidity; and the range of views on how much of increases in credit spreads relates to increased risk of defaults, were also identified as key impacting factors.

However, the firm emphasised, that despite uncertainties, 2020 is still set to be “another busy year for risk settlement”, with £6bn of bulk annuity transactions already completed.

Industry experts have predicted a “bumper decade” for the bulk annuity market despite the current pandemic, with £25bn worth of bulk annuities expected to take place in 2020 alone.

Furthermore, Edwards added that whilst current market conditions may be creating “significant differences in pricing”, the best pricing captured is still “among some of the most attractive seen in years”.

He acknowledged that whilst schemes may question whether they should wait for current uncertainties to lessen before approaching a transaction, market experience has shown that if schemes are ready to transact, they are “better off being ‘in the market’”.

Industry experts have previously highlighted the similar “golden opportunities” that are present amid the current pandemic, for example, the potential to improve bulk annuity pricing and investment offerings.

Edwards concluded: “Volatility is doubled edged - it can lead to very attractive pricing opportunities and it can often be short-lived.

“It is also important for schemes to work with an adviser who understands which insurers are most relevant for their transaction and then to target their market approach accordingly.”

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