Buyouts set to reach £30bn in 2017, says WTW

Over £30bn of liabilities will be insured in 2017, through buyins, buyouts and longevity swaps, according to Willis Towers Watson.

This will be a return to the levels of activity observed in 2014 (£39bn) and 2015 (£18bn), following a slower 2016 (£11bn), as participants allowed for the bedding in of Solvency II and “back books” distracted some market participants from new pensions transactions, while events such as the referendum caused headwinds across the market.

Overall, £9bn of liabilities were hedged through via around 100 bulk annuities in 2016 (£4bn of which was in the fourth quarter), while only £2bn of longevity risk was passed by pension schemes into the reinsurance market. This compares with £12.3bn across 175 bulk annuity deals and £6bn of longevity swaps in 2015.

According to Willis Towers Watson (WTW), an overall increase in the regularity and volume of longevity risk being passed into the reinsurance market is allowing smaller schemes to be more active in the longevity hedging market, as they benefit from “big scheme” pricing, making longevity hedging programmes more attractive.

Commenting, Shelly Beard, director in Willis Towers Watson’s de-risking team, said: “Contracts for smaller schemes looking to hedge against longevity are now easier to implement, as their structure becomes more streamlined over time. Alongside greater access for all to ‘big scheme pricing’, this is really a significant trend to watch over the coming year, as prohibitive cost barriers start to be eroded. In the second half of 2015 and 2016, the longevity reinsurance market was dominated by insurers transferring the longevity risk associated with their new and existing bulk annuities. In 2017, we expect reinsurers’ focus to return to the pensions market and for competitive pricing to be available.”

At the same time that schemes are considering de-risking strategies for the first time, many which undertook buyin transactions over the past few years are expected to return to the market, as they look to further de-risk liabilities. In 2016, WTW advised a scheme on its fifth buyin, having started its buyin programme in 1999.

For those schemes looking to transact buyins and buyouts in 2017, WTW also identified the continuing competition from “back book” business, with a number of insurers looking to transfer away their historic bulk and individual annuity business. This was the case in 2016 when Aegon transferred £9bn of liabilities to Rothesay Life and to Legal & General.

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