Tumbling bulk annuity records should ring alarm bells for small schemes
At a glance:
- While £33bn of bulk annuities have been transacted, the number of deals may be lower than previous years
- Smaller schemes need to be flexible about their timescales to get quotations
- Dialogue must begin now to fit into insurers’ 2020 pipelines
Mega-deals have dominated the buy-in and buyout market this year, limiting insurer appetite for smaller transactions. John Breedon looks at how small schemes can get ahead for next year.
It's only October and yet 2019 has already been a record-breaking year for the bulk annuity market. The recent announcement that Rothesay Life has agreed the transfer of nearly £17bn of pension liabilities this year (including £4.7bn from Telent, £3.8bn from Allied Domecq, and £3.8bn from Asda), saw 2019 surpass all previous records for the total value of bulk annuity transactions. It also confirms that there is no shortage in the supply of capital or availability of reinsurance and calls into question whether any transaction size is too large.
During the first half of 2019, the total volume of transactions was £17.5bn. Adding in other significant transactions completed since June - BAT (£3.4bn) and Tate & Lyle (£0.9bn) - and 2019 has now surpassed the £34bn mark, breaking the previous record of £24.2bn set in 2018.
However, as transaction volumes break records, the same cannot be said for transaction numbers, which are collapsing. Over 200 transactions were completed in 2013 but the number of transactions completed in 2019 could well be fewer than 100, due to human capital constraints. Put simply, there is a shortage of people with the necessary qualifications and experience to crank the numbers.
More power to the insurers
One crucial impact of the rise of these mega-transactions is that insurers can pick and choose which schemes they are willing to engage with. Insurers now have the upper hand over schemes when determining the terms and conditions on which they are prepared to enter into a transaction. This is especially true for transactions under £100m.
Consequently, smaller pension schemes must be more flexible when setting the timescales for obtaining initial quotations. They must be clear about their objectives and adhere strictly to insurer timings.
Additionally, the dynamics of the market have evolved. It is no longer the case that the best deals are available at the end of the year, when insurers historically sought to maximise volumes to hit annual targets. Many insurers had already hit their annual targets by mid-year, with some ceasing to quote for the remainder of the year and instead focusing on implementing their current work, while others are choosing to increase their premium rates.
What 2020 holds in store
It is hard to pinpoint the driving factors behind each individual transaction; however, two key themes can be identified. The combination of strong investment returns over recent years, resulting in improved funding positions for some pension schemes, and current global market uncertainties (whether they are trade tensions, Brexit, or other uncertainties), are likely to have persuaded trustees and sponsors to accelerate their journey plan to secure their future funding position.
With these factors in mind, we would expect 2020 to be another record-breaking year. Indeed, if reports earlier in the year are confirmed that the British Steel Pension Scheme trustees are seeking to enter into a buyout transaction to secure the liabilities of their £10.9bn pension scheme, then Telent's record as the largest ever single transaction could soon be eclipsed.
What smaller schemes should be doing
If next year proves to be another historic year, then the resources consumed by mega-transactions will mean that smaller schemes will continue to find getting engagement from insurers challenging. The stranglehold caused by insurers' limited human capital will put small schemes at a significant disadvantage.
All is not lost for the trustees of smaller pension schemes when it comes to pricing in 2020, however. Trustees may need to brace themselves and be prepared to temper their expectations and while the initiative is currently with insurers, good preparation and planning can go some way to mitigate this.
Conversations with insurers can be lengthy and require a large amount of preliminary work to be undertaken, both in terms of strategic planning and practical preparation. Consequently, to have a realistic chance of completing a transaction next year, small- to mid-sized schemes need to initiate an open dialogue with insurers now.
The challenging environment for small schemes is unlikely to last forever. Looking beyond 2020, we would expect market uncertainties to subside. As insurers continue to meet demand by hiring more people, capacity should improve, and smaller schemes should start to regain a foothold as the market rebalances and the balance of power flows back towards pension schemes.
John Breedon is head of strategic, asset and risk solutions at Buck
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