Fertile terrain for pension scheme de-risking
Costas Yiasoumi expects a bumper year for bulk annuity de-risking and says preparation can help schemes achieve their risk management objectives.
This is the time of year when I'm planning the planting season for my allotment. Like the bulk annuity market, some years can be more fruitful than others and, whilst you can focus on the year in hand, it is the longer term trends that shape what future years will hold.
A bumper harvest
Will this be a year of bumper harvest for trustees and corporate sponsors looking for affordable and suitable bulk annuity solutions? Or, a lean year of investment in anticipation of an abundant future?
Well, setting aside unexpected financial, political or legislative turmoil, we expect to see a continuation of the pattern of many trustee boards looking to better secure member benefits with insurers. Market predictions from various consultancies are falling in the £10-15 billion range for 2017 bulk annuity premium expenditure. This is not dissimilar to previous years.
Our key message for pension schemes this year is that we believe there will be opportunities in 2017 to help make your risk management objectives become reality. But like growing fruit and vegetables, preparation is the key.
Schemes will be rewarded many times over by meticulously preparing so that they can take advantage of insurer capacity and favourable pricing when it arises. The pension consultancies are well versed in what needs to be done here, from data cleansing and defining the benefits to be insured, to key contractual requirements, investment alignment and governance/decision metrics.
What trends are in bloom?
I'll cover three emerging trends whose impact may have been noticed periodically in 2016 which I believe will become more regular features in the future.
The de-risking habitat
Firstly, the way in which bulk annuities are purchased will, for many cases, move away from an 'all insurers' bidding process to one in which only a small shortlist of insurers or even just a single firm is approached. The fact is pricing of bulk annuities has become ever more complex over the last few years. To name a few aspects, there was the introduction of Solvency II at the start of 2016, the subsequent increased benefit of reinsurance and the increasing use of illiquid assets by insurers whose higher yield helps support improved pricing. It is difficult for insurers to coordinate all of these and other moving pieces.
Consequently the best outcome for schemes is sometimes achieved by the trustees partnering early on with an insurer and then, in tandem, using advisers who can give comfort on pricing in the absence of a whole of market process.
Deep roots, strong foundations
Secondly, we anticipate increasing differentiation by trustees in deciding between insurers in the area of long term insurer commitment and credibility, especially in an environment of increased uncertainty from the Brexit process and anticipated life sector consolidation. We are not talking about security here - life insurance companies are very secure - in fact to our knowledge no UK life insurance company has ever defaulted against policyholders.
Nevertheless trustees will increasingly seek comfort that the organisations they approach for bulk annuities, whatever their size, will likely remain in situ, active and committed to the market, in the long term.
And thirdly, for very large schemes, we increasingly expect scheme liabilities to be secured via a series of bulk annuity purchases over a period of time as opposed to a single large transaction. Although single large transactions can offer advantages and in many cases are the way forward, the downside is the complexity in orchestrating all the moving parts required for successful execution. For schemes that cannot afford a full scheme buyout at outset a series of bulk annuity purchases steadily works towards the end target.
Like managing an allotment, the end outcome in the short term can depend on things outside of your control (in my case, the Manchester weather!), but with good preparation and by taking account of the important trends, a successful outcome can be achieved.
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