LONDON (19 July 2017) – Aon plc (NYSE:AON), has said that after a relatively slow start to the year, the second half of 2017 is shaping up to be a bumper period for the bulk annuity market. Extremely attractive pricing – with levels currently at a 10 year high – and plentiful capacity as insurers hunt for deals, are all driving an increase in activity.
Martin Bird, senior partner and head of Risk Settlement at Aon Hewitt, said:
“This market always has a range of factors which affect the way it operates and particularly the timing of deals. But as we hit the halfway mark in 2017 it’s clear that the ‘stars have aligned’ to make pricing levels look very attractive and we expect a corresponding rise in activity.”
Key factors include:
- Pension schemes’ funding levels are improving, particularly schemes with significant equity exposure. These are benefiting from the UK stock market surge since the EU Referendum. Schemes with exposure to overseas currencies have also benefited from the fall in the pound.
- The Solvency II regime has, to a large extent, bedded down and insurers are optimising investment strategies that enable them to set prices at attractive levels. This includes investment in long-dated illiquid assets, including infrastructure, property assets, mortgage related securities and bespoke debt arrangements.
- Insurers writing bulk annuity deals typically hedge longevity risk into the reinsurance market. The latest longevity trends, which indicate that improvements in life expectancy have been slowing over the last five years, are now being reflected in reinsurance pricing levels and are helping to support attractive annuity pricing.
- Full scheme buy-outs are a realistic proposition for many schemes as insurers have become increasingly confident in accommodating deferred member risk. Some providers are now actively seeking this risk to complement the assets they can source to back such transactions.
- With interest rates staying at their historic low, companies are still able to borrow cheaply in order to top up any remaining funding shortfall and to remove legacy defined benefit schemes from the corporate balance sheet.
John Baines, partner in Aon Hewitt’s Risk Settlement Group continued:
“This is all good news for the risk settlement market – but only if pension schemes are ready to capitalise on opportunities this situation brings. To do this, schemes need to do the groundwork properly, making sure that scheme data is in good order and giving consideration to how a bulk annuity will fit within the scheme’s de-risking plans. They must also have clear decision making and governance processes. They will then need to be patient and wait for the right price to materialise – but armed with the ability to move quickly when the time is right. And increasingly, that time is emerging.
“We launched Aon’s Bulk Annuity Compass last year with these market changes in mind. Compass enables a regular two way flow of information between schemes and insurers, with insurers able to review schemes and provide refreshed pricing at any time. This means that when insurers are able to offer attractive pricing, they have a pool of cases which they know are ready to move to a deal - and it is those schemes that will be in a position to transact quickly.”
Aon plc (NYSE:AON) is a leading global professional services firm providing a broad range of risk, retirement and health solutions. Our 50,000 colleagues in 120 countries empower results for clients by using proprietary data and analytics to deliver insights that reduce volatility and improve performance.
Aon Bulk Annuity Compass
• The Aon Bulk Annuity Compass broking platform has completed over £1bn of bulk annuity transactions within one year of its launch last summer.
• With a strong focus on getting schemes suitably prepared and positioning their risks with appropriate insurers, Bulk Annuity Compass has achieved a 100% conversion rate for schemes taken to market so far in 2017, and has successfully transacted more than 11 cases (ranging from £600m to £1.5m) with many more installed on the platform
• Over the last 12 months, Aon has provided lead advice on close to £3bn of bulk annuity deals (buy-ins and buy-outs) - more than a quarter of the market
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