The recent market shocks seen during March and April 2020 have had an impact on bulk annuity pricing. This has been mostly favourable but only the most prepared and well-hedged schemes will have been able to take these opportunities. In this article we look “under the bonnet” at why pricing has moved and what it could mean for schemes who are transaction-ready and perhaps looking to access those opportunities in future.
Taking each factor in turn:
Overall this led to some improvement in buy-in pricing across insurers but one interesting feature is that each insurer had to take a view on whether they could obtain those improved credit spreads for the transactions they were quoting on - particularly at a time of low liquidity for credit. This element of subjectivity meant that we saw a much wider spread of pricing on deals with some insurers taking a prudent approach whereas others (perhaps with warehoused assets ready to be used due to some near-complete transactions being paused) could be more bullish on the returns they could achieve once a transaction had signed.
March 2020 showed that pricing opportunities can come through, driven by asset class return shocks. The credit spread widening was significant for 2 weeks in late March but has now dropped to a more stable level (although still higher than prior to the COVID-19 market shock). This relative stability means that well-prepared schemes can still access more positive pricing than they would have seen at the start of 2020. Those schemes that have been best placed are those that have been well hedged and particularly holding gilts rather than credit (as it has been difficult to liquidate credit to pay for a bulk annuity). Furthermore, those schemes who have previously approached the market as “transaction ready” but did not find the right pricing were able to come back and take the opportunity as pricing increased by 20-30bps overnight with other transactions put on hold.
Whilst March 2020 did provide some pricing opportunities our view is that over the next year we may see further opportunities for improved insurer pricing due to, for example:
For schemes whose next step might be a pensioners buy-in but where the price target has not been achievable we believe that getting the data and assets in your scheme “transaction ready” could lead to opportunistic transactions later this year. It is important to start sharing scheme information with insurers, including your ideal price target, so that they know you are ready to move if and when they get those opportunities - which will be specific to each insurer.