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Last year, 2,000 former employees of engineering group GKN received a thick envelope
through the letter box with big news about their retirement.
GKN had decided that it no longer wanted to pay their pensions, and so had passed them
all on to Pension Insurance Corporation, an insurer, in a £190m deal.
Millions of other pensioners are likely to receive similar letters over the coming years if
predictions of a boom in the so-called bulk annuity market are borne out. Volumes increased
by about a fifth last year to £12bn, according to consultancy LCP, which is predicting a 25
per cent rise this year.
Spotting opportunity, a clutch of life insurers is taking a much bigger interest in a market that
has traditionally been the preserve of specialists such as PIC, its rival Rothesay Life, and
bigger groups such as Legal & General.
Scottish Widows is one of them. It entered the market in 2015, and is now looking to
increase its market share. “It’s an opportunity for growth in an area where we already have
expertise,” said Emma Watkins, bulk annuities director at Scottish Widows.
Other newcomers include Phoenix, which completed its first bulk annuity deal last year,
while Aviva, which has traditionally operated at the smaller end of the market, said it wanted
to do bigger deals
. It has recruited Tom Ground from Legal & General to lead the charge and has increased
the size of its bulk annuities team by about a third.
What they all see is a rare opportunity for growth in an otherwise uninspiring life insurance
market. The total value of liabilities in UK private sector defined benefit pension schemes is
£2.1tn. Only £12bn of that was transferred to the insurance industry last year, leaving plenty
of scope for more deals.
“There’s more demand from pension schemes, so it’s not surprising that more insurers are
entering the market,” said John Baines, a partner at consultancy Aon.
Gordon Aitken, analyst at RBC Capital Markets, said: “If you speak to any finance director of
a defined benefit sponsoring company, they’d want rid of it...The defined benefit market is
colossal.”
Those finance directors are in a better position to act now than they were just a year or two
ago.
According to RBC Capital Markets, a combination of strong stock markets, falling life
expectancy and higher interest rates has pushed aggregate UK pension schemes from
deficit into surplus for the first time since 2000. “Pension funds are in a lot healthier position
than they have been,” says Mr Aitken.
The closer a scheme is to being fully funded, the easier it is to pass it on to an insurance
company.
The joker in the pack is “back book deals”. Corporates are not the only organisations that
want to get rid of pension liabilities. Some insurers want to as well. Prudential, for example,
is trying to sell £12bn of old policies to the same insurers that are taking on corporate
schemes — the equivalent of the entire bulk annuity market last year.
“Back books will affect the market hugely,” said Mr Aitken. “The size is huge compared to
the annuities coming out of pension schemes in the past.”
If Prudential gets all £12bn away this year, that would use up plenty of capital — insurers
have to put up capital worth about 10 per cent of the liabilities when they take on annuities.
For now, say consultants, there is capital available. According to LCP, insurers have enough
capital to do £25bn of deals, a fifth more than was available this time last year.
PIC and Rothesay, which are both privately owned, say their investors are willing to put up
cash if necessary, while Aviva and Legal & General say they have plenty of capital
available.
Other investors are also sniffing around. Ian Aley, head of transactions at consultants Willis
Towers Watson, said there has been “an increase in the number of inquiries from investors
interested in the market”. These include sovereign wealth funds, hedge funds and private
equity funds, he said.
A bigger threat to the market could be the availability of assets to back the liabilities.
Traditionally, insurers have backed their annuities with government or corporate bonds. But
as returns on these have fallen, insurers have cast their nets further, looking to long-term
assets such as infrastructure. However, good infrastructure assets are few and far between.