As the number of small bulk annuity deals have fallen year on year despite overall growth in the market, Kristian Brunt-Seymour explores how small schemes can avoid being squeezed out.
At a glance:
- Buy-in and buyouts under £100m have fallen 25% year-on-year since 2013.
- Smaller schemes need to demonstrate to insurers that they can be swiftly transacted.
- Small schemes can join together making them attractive to insurers.
The bulk annuity market is thriving with just over £10bn a year of buy-in and buyout transactions now the norm, and several massive deals in 2015.
Yet smaller schemes have historically found it challenging to do bulk annuity deals.
Figures from Lane Clark & Peacock (LCP) showed the number of buy-ins and buyouts valued under £100m have been falling year on year fall as some insurers focused on larger transactions.
The number of transactions fell by 23% in 2013 from 178 transactions to 137 in 2014, and then by a further 26% to just 76 transactions in 2015 based on the projected number of sub-£100m transactions for Q4 2015.
The collective value of these transaction volumes also decreased from over £2.2bn in 2013 to just over £1.2bn in 2015.
Despite more competition among insurers than ever and an increase in the number of bulk annuity deals being transacted, experts argue insurers are becoming more selective.
This is being fuelled by a larger number of bulk annuity deals to cherry pick from. Also, operational capacity among some insurers, particularly in terms of resources and manpower, is not increasing to match the higher demand from smaller schemes, argues LCP partner Charlie Finch.
He predicts these trends are unlikely to change, particularly when larger deals can produce higher profits compared to the resources dedicated to them.
"Going back a few years participants would have been keener to quote at the smaller end of the market," Finch explains. "But increasingly insurers have been targeting the bigger transactions with smaller schemes being priced out of the market."
Indeed, KPMG pension insurance director Tom Seecharan argues insurers also tend to target large schemes that are likely to do a series of transactions. Insurers may also wish to work with a company that has several pension schemes to potentially undertake a buy-in or buyout.
New capital buffers under Solvency II is also having an impact by constraining insurers' resources and forcing them to redesign their processes to quote for future business.
The European regulation which came into force in January has also made insurers consider the costs of reinsuring their longevity risk, which is easier to implement on large deals than smaller ones.
However, Legal & General (L&G) head of core business and bulk annuities Phill Beach says that demand from smaller schemes still makes up 60% of the quotation requests that L&G receives.
"I don't feel quite as worried for smaller schemes as others might," he says. "The needs of smaller schemes are the same as larger ones but can often be better funded so transacting them can still be an attractive proposition [for an insurer].
There can be a marginal time difference between transacting large and small deals in terms of collating data, analysing contracts and agreements.
In light of this LCP's Finch says trustees should demonstrate that their schemes can be swiftly transacted and that their members are clear about how they want to transact. He argues schemes that fail to demonstrate this can end up paying up to 5% extra in costs to insurers or not be able to transact at all.
L&G's Beach says there are several options in the market for smaller schemes. This includes consultants making their processes much more efficient and increasing innovation such as setting up propositions to combine smaller schemes, effectively streamlining their transaction processes.
"Historically, much of the innovation has been on the larger schemes because they give the biggest return with aspects like longevity swap, but I'm seeing more innovation at the smaller end of schemes such as medical underwriting," he says. "You've got technological developments taking place such as pricing infrastructure which makes the process quicker and overhead costs lower."
KMPG's Seecharan says that the issue of the size of smaller schemes can be addressed by combining several together in a process called group insure.
This allows individual scheme quotes and valuations to be combined, making them collectively larger, more valuable and therefore more attractive for insurers.
"This process brings more choice, more flexibility, lower insurance cost and lower implementation cost," Seecharan explains. "It saves time getting individual quotes and valuations from each of the schemes and can be much more efficient turning several £30m deals into a £180m deal for example."
Experts agree the dynamics of the bulk annuity market in terms of larger transactions is likely to remain in the foreseeable future. However, if trustees prepare correctly, take advantage of market innovation and make their schemes quicker and more valuable to transact, then good deals and prices for de-risking can be achieved.
The Smiths Industries Pension Scheme has secured a £146m buy-in with Canada Life in its fourth bulk annuity and its sponsor’s tenth overall.
The Prudential Staff Pension Scheme has entered into a £3.7bn longevity swap with Pacific Life Re, insuring the longevity risk of over 20,000 pensioners.
The Baker Hughes (UK) Pension Plan has secured approximately £100m of liabilities through a buy-in with Just Group.
There have now been a total of 30 longevity swaps over £1bn publicly announced. The full list, provided by Willis Towers Watson and through PP research, is as follows...
The Reckitt Benckiser Pension Fund has secured a £415m buy-in with Scottish Widows, insuring the benefits of around half of pensioners.