Pensions - Articles - Derisking predictions show need for bulk annuity mega deals

2018 saw unprecedented large-scale bulk annuity transactions, which is predicted to continue in 2019, but how are small schemes faring in their wake? The potential for asset shortages, buyout alternative innovation and macro headwinds are all likely to sway the wider de-risking market in the year ahead.

 Four factors are set to determine what schemes, from large to small, need to consider as they weigh up their de-risking options for the year ahead, according to Willis Towers Watson’s 2019 de-risking report. Last year saw unprecedented bulk annuity transactions activity, with significantly more than £20 billion of bulk annuities transacted, and this ongoing trend is likely to impact the market in 2019.

 The small scheme dilemma
 As the bulk annuity ‘mega deal’ trend looks set to continue, smaller schemes are potentially at risk of missing out on attractive pricing as insurers prioritise resources to large-scale, high value deals. Smaller schemes will need to work hard to demonstrate ease of doing business – this includes proving their is commitment to the transaction from both the trustee and the sponsor, articulating a clear pricing target to the market and providing clean and complete data. Without these elements in place, large deals will dominate.

 Innovation in alternatives to buyout
 Credible alternatives to a full scheme buyout are likely to cement their footprint in the market this year – three examples include:
 Commercial consolidators – a DB master trust where the employer covenant is replaced by a capital buffer
 Non-traditional insurance products – insurers currently providing bulk annuities, innovating to improve affordability for schemes
 Fiduciary asset management – delegation of investment implementation to a professional provider.
 As schemes have more choice than ever on their preferred de-risking solution, they should think carefully about the right destination given their funding plan and sponsor covenant.

 High yield asset supply and demand imbalance
 Access to high yielding income generating assets is crucial for insurers’ ability to price bulk annuity deals attractively. During 2018, as competition for large-scale bulk annuity deals increased, we saw insurers begin to struggle to access these much-coveted assets. As the market grows further in 2019, this trend will further dictate insurers’ bulk annuity strategies in the year ahead, and insurers may need to innovate to maintain attractive pricing.

 Macro headwinds – Brexit and GMP equalisation
 Brexit and GMP equalisation are key macro headwinds which may affect deal activity in 2019. Pension scheme funding levels are largely resistant to investment markets, any market volatility may present opportunities for those poised to transact bulk annuities, and any exchange rate movements may improve buyout affordability for overseas sponsors.

 Commenting on the trends, Shelly Beard, Senior Director at Willis Towers Watson, said: “2018 was a remarkable year for bulk annuities and de-risking innovation, and we expect to see more of this growth in 2019. There are, however, several significant factors at play which could sway the direction of travel. Whether that’s the ‘mega deal’ market impacting smaller schemes, macro headwinds or innovative de-risking solutions, trustees and sponsors need to ensure their de-risking strategy is firmly on the agenda in the year ahead.” 

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