Bulk annuity pricing opportunities in 2020

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.

What factors drive a bulk annuity price?

  • Returns on the assets available in the market
  • Matching Adjustments to asset returns applied by the PRA to insurers’ capital requirements
  • Costs of hedging interest rates, inflation and longevity
  • Return requirements of capital providers
  • General supply/demand features for each insurer

What did we see in March 2020?

Taking each factor in turn:

  • Insurers whose price is driven by credit and equity release mortgage books saw increases in the returns available on those assets. At the time of writing there have not been any significant downgrades or defaults on credit.
  • There have been no significant changes to matching adjustments meaning the potential “gains” from above are coming through in more attractive pricing
  • Costs of hedging have increased as a result of the low yield environment
  • Similarly, the return requirements of capital providers may be greater given the low yield impact on cost of debt elsewhere

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.

What could happen to pricing in the remainder of 2020?

Credit spreads to 30 April 2020

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:

  • An increase in equity release demand as consumers look to access liquidity this way; or
  • An increase in infrastructure investment as governments worldwide encourage institutional investors to reignite economies via investments. This may look different to previous projects (e.g. perhaps more investment in communications technology to enable working from home, rather than additional city-centre office blocks) but could enable insurers to invest in new projects which fit well with the long-dated pension liabilities they are taking on.

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.

Contact us

Nikhil Patel

Nikhil Patel

Insurance and Consolidation Specialist, PwC United Kingdom

Tel: +44 (0)7808 105973

Jani Singh

Jani Singh

Insurance and Consolidation Specialist, PwC United Kingdom

Tel: +44 (0)7525 283107

Steven Dicker

Steven Dicker

Pensions Strategy Leader, PwC United Kingdom

Tel: +44 (0)7740 242783

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