Covid-19 has caused a slowdown in the number of bulk annuity transactions, with buy-ins and buyouts expected to amount to a maximum of £25bn this year, Willis Towers Watson says.
The consultancy estimated total volumes would amount to a minimum of £20bn, less than half of the £44bn recorded last year, and lower than the £24bn recorded in 2018. So far this year, around £7.6bn of deals have been announced.
Nevertheless, Willis Towers Watson said the market had continued to be busy since lockdown began, especially with well-hedged schemes often finding themselves closer to buyout pricing due to widening credit spreads.
The consultancy said schemes that were already partway through a bulk annuity process were most likely to have taken advantage of "exceptional pricing opportunities", as well as those who were able to transact repeat business.
Senior director Shelly Beard said: "Although credit spreads have narrowed again over the last eight weeks, there is still potential for more attractive pricing over the remainder of the year. This is due in part to potential market volatility, but also because insurers are likely to seek out ways to compensate for a fall in new business volumes.
"This could bring about the return of the ‘end of year sale' for the first time in several years, whereby prices are cut as the year draws to a close. Schemes who wish to take advantage of that will need to get into the market shortly."
The volatility in the market has "restored more balanced market dynamics", she added.
Meanwhile, longevity swaps are expected to boom, with around £25bn of hedging deals predicted to be transacted. Just one longevity swap has been announced so far this year, a £10bn deal between three Lloyds schemes and Pacific Life Re, via Scottish Widows.
Willis Towers Watson said there was "significant appetite" for reinsurers to complete such deals with "very attractive pricing" arising from the decline in bulk annuity business.
Head of transactions Ian Aley said: "Naturally there are questions about what Covid-19 means for ongoing longevity swap processes. While the impact on each scheme today can be monitored, the prospects for future improvements in life expectancy are perhaps more uncertain than they ever have been - and it's going to be many years before we know in full how Covid-19 and its economic side effects will affect life expectancies.
"Our clients are taking the view that if they can afford to hedge longevity risk and the pricing looks attractive, now is a good time to proceed, rather than attempting to predict where the market might go in the future."
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