Short-term bulk annuity pricing has become less predictable due to volatile market conditions and insurers adjusting to Solvency II, according to Aon Hewitt.
The consultant's bulk annuity market update for January 2016 highlighted an expected increase in the cost for bulk annuities covering members who had not yet retired.
However, material change was not expected in the best available pricing for pensioners as a result of Solvency II - the new EU-wide capital regime for insurers.
Aon Hewitt risk settlement adviser Dominic Grimley pointed out many providers had already planned their market models in the medical underwriting market and that pricing had settled down accordingly, adding: "Pricing for some insurers may have gone up slightly but the best pricing is very similar to where it was last year and we've not seeing any shock results from the first auctions this year post-Solvency II.
"Although pensioner pricing in the traditional bulk annuity market is looking similar to before Solvency II, with some opportunities already appearing this year, the picture for the medically underwritten market will understandably need a little time to settle given the imminent merger."
Grimley advised a pro-active strategy with scheme providers not holding off from getting ready if they believed a transaction was appropriate for them in opportune market conditions.
"The bulk annuity market is normally quieter in January than the rest of the year, but if scheme providers don't get out there and start planning soon opportunities may pass them by," Grimley said. "There are some good opportunities with insurers already this year and most schemes haven't got started on 2016 planning."
Importantly, market volatility increased the incentive for schemes to be ready to de-risk if affordable risk settlement opportunities arose. Preparation was key for scheme providers that wanted to be in position to take advantage of these opportunities.
Swap yields had fallen relative to gilts during the last quarter of 2015. The report concluded this situation could improve again while a scheme was seeking market quotations, but the timing of such an improvement was unpredictable. This may affect the appropriate price target for schemes planning a bulk annuity purchase using a target linked to a gilts liability measure.
The report encouraged schemes to prepare for appropriate transactions if ‘opportune market conditions' arose. This was against the prospect that presently substantial capacity in the annuity market would reduce throughout the year as business was placed.
Also, increased participation in the medically underwritten sector, along with LV=, would act to offset any decrease in competition following the anticipated merger between Just Retirement and Partnership later in 2016.
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