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Survey Report

Where next for the longevity de-risking market?

Chapter 8 of the 2020 de-risking report

Pensions Corporate Consulting|Pensions Risk Solutions

By Sadie Scaife | January 20, 2020

Sadie Scaife predicts what we can expect from the longevity hedging and bulk annuity markets in 2020.
  1. 01

    Continuation of a very busy market

    I expect a continuation of the very busy market, which led to each of the last two years reaching record-breaking levels of business, with total volume of bulk annuity business of around £30 billion for 2020. Although I don’t expect 2020 to break bulk annuity records in terms of total volume of business, I anticipate more transactions than in 2019, but fewer at the multibillion level which made 2019 exceptional. I think we could continue to see schemes that have previously completed a longevity swap transferring these to the bulk annuity insurer as part of a buy-in. I also expect a busy start to 2020 reflecting pent-up demand from schemes that have not been able to transact by the end of 2019.

    So why do I expect the appetite for bulk annuities to continue? Scheme funding levels have generally trended upwards from a combination of positive asset returns and longevity gains and although we aren’t anticipating longevity gains this year because of lighter death rates in 2019, this is acting as a reminder to schemes that the risk is still worth hedging, rather than dampening enthusiasm for transactions.

    GMP projects will continue to take up valuable time and resources with pension schemes, but this need not hinder those schemes wanting to carry out a transaction at the same time.

  2. 02

    Continuing insurer operational constraints

    For the insurers, constraints caused by problems sourcing capital and assets will continue to be manageable at the market-wide level, although individual appetites will naturally rise and fall throughout the year.

    Once again the main drivers of capacity will be operational – largely people – resources at the insurers, who will remain selective about the opportunities they choose to participate in. Insurers will want to see a clear plan to a transaction with all stakeholders engaged before they commit their resources, so it will continue to be the most prepared schemes who get the best outcomes in the market.

  3. 03

    Possible shift in what schemes want to see from insurers?

    As well as wanting the most competitive pricing, schemes will need to consider environmental, social and governance (ESG) issues in their selection criteria for an insurer, alongside security and brand. We expect this to receive increased future focus at beauty parades.

  4. 04

    Bumper year for the longevity swap market

    2020 will be a record-breaking year for the longevity swap market, with more swaps than in any previous year and total volumes of in excess of £25 billion. Transactions will be heavily weighted towards white-collar schemes, particularly in the first half of the year, opening up opportunities for blue-collar schemes as reinsurers who have already won business seek to diversify and others target schemes that better suit their preferred demographics.

    Pension schemes will continue to use a variety of structures to access the reinsurance market, with some choosing to establish offshore insurers for this purpose while others will transact with the UK insurers, including some new names in this market.

  5. 05

    Increase in the use of commercial consolidators

    As Tom Ashworth alluded to in chapter 7, delays in the regulatory regime for the commercial consolidation market have meant that we haven’t seen the level of activity we were expecting this time last year. However, I do expect that once the first few pension schemes have gone down this route others will follow. It’s unclear at this stage how large this market could grow, but I think the additional end-game option for pension schemes is a useful addition.

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