Pension scheme bulk annuities: 2018 is now officially a new ‘Personal Best’ for the market

24 September 2018

Earlier this month the Airways Pension Scheme announced their £4.4bn buy-in with Legal & General.  PwC led the transaction and we are proud to have helped the scheme reach a position where, when added to existing insurance contracts, it is now 90% hedged across all risk.

The buy-in transaction is the largest ever such deal between a UK pension scheme and an insurer. This announcement now means that c£15bn of bulk annuities have been written in 2018, surpassing the previous “record year” in the market with over three months of 2018 to go.  Whilst that shows that the market is in good shape it does provide challenges for individual pension schemes wanting to secure a buy-in.

2018 hasn’t been a steady increase in the market, it is a complete shift in market dynamics.  In simple terms – the supply of insurance which is limited by manpower and available assets for competitive pricing is being overtaken by the demand from pension schemes.

Most pension schemes have seen funding improvements over the last 2 years and, with attractive bulk annuity pricing available, we are seeing almost an unprecedented number of approaches to the insurance market. As a result, as we go into 2019, the balance is now tipping to pension schemes competing with each other for available capacity in the bulk annuity market rather than the previous position of insurers fighting over a more limited number of transactions being taken to market.  

This changing landscape means advisors need to take a new approach to leading pension schemes through the bulk annuity process.  The tried and trusted method of a scheme preparing its data and governance and then running an auction process will still succeed in some cases. However, 2018 has shown that at some points in the year a particular insurer may be less willing or able to put its best price forward due to its commitment to other deals (both in terms of manpower and assets to back pricing).  This feature is likely to continue through 2019 and schemes seeking a bulk annuity need to be fully aware of the continuing market dynamics from month to month, and which insurers have which pricing opportunities at any time. Pension schemes need to be patient and realise that to get the price they require they may need to ‘join the queue’ with one or two insurers rather than window shopping across the market and taking what’s on offer that day.

Although the Airways Pension Scheme deal was the largest buy-in to date, this isn’t just about big schemes.  We are seeing relatively attractive pricing coming through for smaller schemes but this is often a result of a patient approach to securing the transaction – getting a realistic view of market pricing early and then planning from there.  Especially for small schemes it is not effective to come to market on the promise of getting the same price that another scheme happened to achieve in the preceding weeks and months. To secure interest from insurers in a busy market smaller schemes need to know their realistic target price and work to that.

2018 has indeed been a PB for the market but what about 2019?  The strong flow of deals will be there and current pipeline suggests we are likely to see another record year in total.  However, each pension scheme approaching the bulk annuity market will require a patient strategy and trusted independent market insight to secure the deal they require.  

Ben Stone

Ben Stone | Head of Risk Transactions
Profile | Email | +44 (0)20 7804 0113

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