A strong year for risk transfer
To the delight of corporate sponsors, pensions trustees and their members, 2018 proved to be quite the year for the pension buy out and buy in market, with around £30bn of pensions benefits moving on to the books of UK insurers. Although large transaction volume growth was expected, few predicted an increase of quite this magnitude, after £12.3bn of transfers in 2017, with similar volumes in years previous. Given this strong market growth, what is the prognosis for schemes and insurers to continue doing this level of business in 2019?
Drivers of Growth
In 2018, high levels of demand from schemes for buy ins and buy outs were driven primarily by improved funding positions and attractive pricing from insurers. Strong asset performances in the second half of 2017 and the first half of 2018, as well as a plateauing of changes to longevity, allowed schemes to be in a funding position where they could come to market and transact. 2019 is likely to see a continuation of strong funding positions, as more corporate sponsors look to capitalise on current pricing in the market and offload their pension risk. Given that for many corporates and trustees a buy in or buy out is viewed as the ultimate goal of their DB pension journey, adequate funding positions, alongside attractive insurer pricing, are the key to allowing schemes to continue to come to market.
Attractive insurer pricing in 2018 was reciprocally also driven by strong asset sourcing in the second half of 2017 and the first half of 2018, as well as changes in longevity assumptions. Given reduced asset performance in the second half of 2018, this has seen prices harden compared to earlier in the year, which is likely to continue to lag into the first half of 2019. However, it is important not to overstate price hardening – by historic levels current prices are still sufficient to drive a high volume of transactions this year.
Constraints to Continued Growth
Given the continued strong demand from schemes with improved funding positions, as well as the continuation of attractive pricing (albeit slightly less so than early 2018) from insurers, expectations for 2019 across the market seem to be that deal volume will match 2018. However, with around £2trn of DB pension liabilities in UK schemes, £30bn still remains a small fraction of this, so what else could be constraining further growth?
There are two particular capacity constraints for insurers that are of concern going forward. The first of these, which I have already touched on, is asset sourcing. The difficulty here is both sourcing the right assets in which to invest the premium, as well as getting the right allocation to support continued attractive pricing. The second of these is the issue of people – producing pricing quotes for these transactions is a time consuming and resource intensive process, and hence, schemes are having to work harder to engage their preferred insurers, when so many other schemes are seeking similar transactions. Schemes, therefore, will need be very well prepared by the time they come to market, with their data and governance in order and a full project plan, as well as a commitment to transacting to ensure that they can give insurers confidence.
The Solution
Whilst some commentators have focused on the lack of assets as the key issue, this can be challenged, as such a view seems to suggest that there are not enough real assets globally to support the UK DB pension ecosystem. Might it be more appropriate to say that the challenge is not the existence of these assets, but in their origination? The solution to both this origination issue and to the problem of insurer pricing capacity is ultimately retaining talent and increased hiring. Finding and retaining the right people who are able to originate private debt and associated assets that provide long term cashflow is crucial. Concurrently, providers will need to grow their pricing teams in order to relieve these capacity issues. On the advisor side of the market, finding and retaining experienced consultants that can source deals, have strong existing relationships with insurers and a track record of successful transactions is crucial.
The structural problem of a lack of labour to conduct pricing on the part of insurers appears to be the pressing issue, given that even if asset positions improve and insurers are more selective as to which schemes they engage with, this still places a limit on the number of deals that can be carried out. As such, retaining talent and growing these teams will be vital to the continued growth of the bulk annuities market.
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Author:
James Calderwood
To discuss this market in more detail and see how Plenum’s network in the space can be of use please contact:
james.calderwood@theplenumgroup.com 07944 733330 or TC Jefferson tcjefferson@theplenumgroup.com 020 70784895