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Uk Db Bulk Pensions Insurance MARKET REVIEW 2016 HEALTH WEALTH CAREER UK DB BULK PENSIONS INSURANCE MARKET REVIEW SECOND EDITION, JULY 2016 1 UK DB BULK PENSIONS INSURANCE 2 MARKET REVIEW 2016 CONTENTS 01 02 03 FOREWORD - A BUMPY START - £12 MEDICAL UNDERWRITING WELCOME TO THE BILLION OF BULK ANNUITY – A KEY TO UNLOCKING SECOND EDITION TRANSFERS TOOK PLACE IN OPPORTUNITIES OR THE THE FIRST HALF OF 2016 KEY TO PANDORA’S BOX? 04 05 06 LONGEVITY SWAPS – THE ART OF ASSESSING MERCER PENSION RISK INCREASING RANGE OF YOUR SCHEME’S LONGEVITY EXCHANGE® - CREATING A OPTIONS FOR EFFICIENT RISK AND DECIDING CLEAR LINE OF SIGHT TO A LONGEVITY RISK TRANSFER WHETHER TO BUY POTENTIAL “END GAME” PROTECTION 07 08 09 A REVOLUTION IN THE ALIGNING INVESTMENTS AS WHY ARE INCREASING SETTLEMENT OF LARGE PART OF A BULK ANNUITY NUMBERS OF SCHEMES PENSION LIABILITIES TRANSACTION C A R R Y I N G O U T A PENSIONER BUY-IN? 10 LIST OF BULK ANNUITY AND LONGEVITY SWAP TRANSACTIONS 1 UK DB BULK PENSIONS INSURANCE 01. FOREWORD WELCOME TO THE SECOND EDITION OF UK DB BULK PENSIONS INSURANCE — MARKET REVIEW. In our fast moving and volatile “post Brexit” world, it is now even easier than it was to miss the right deal or the right opportunity. Bulk pensions insurance policies are irreversible and decisions made, or not made, have long-lasting outcomes. Keeping in touch with the latest developments in the UK DB bulk pensions insurance market is David Ellis Mercer UK Leader, important for all stakeholders, so we have sought Bulk Pensions Insurance Advisory to bring you the latest information in this market review, including all the latest deal statistics – articles 02, 04 and 10, and how to get actual insurer prices every month – article 06. 2 MARKET REVIEW 2016 Rapidly changing political and economic circumstances remove much or all of a sponsoring employer’s legacy following the UK’s vote to leave the European Union have pension liabilities at economics that can be substantially reinforced the need for trustees and sponsors to look different from desktop estimates. Plans of all sizes again at their pension schemes, to check that what they can be transformed, sometimes in short periods and are doing continues to be relevant and importantly to a number have now successfully done this – more in check that the overall level of risk the scheme is running article 07. continues to be appropriate. The UK bulk pensions insurance market is increasing Bulk annuity pricing has been robust, despite the in size over time as many sponsoring employers and continued reduction in low risk yields (gilts) over the first trustees aim to move their UK pension obligations to half of 2016 and several schemes have accelerated their an insurer by purchasing a bulk annuity. bulk annuity processes to take advantage. Pricing has remained particularly keen for pensioners in payment, Over the last 25 years, approximately £80 billion in DB relative to gilts, and that is where we have seen the obligations has been transferred to insurers using bulk majority of transactions so far during 2016 – more in annuities plus £60 billion using longevity swaps, but this article 02. For deferred members, the market continues will be dwarfed by transaction volumes expected in the to see significant pricing differences between insurers next 20 years as it becomes increasingly attractive to as consensus views on deferred member pricing under make such transactions. the new Solvency II regime introduced on 1 January 2016 take time to bed in. Mercer’s Bulk Pensions Insurance Advisory group has led on more than £17.5 billion of UK buy-in and buyout In this edition, we have brought you new points of view, transactions, more than any other advisor, including all on medical underwriting (MUBA) and on longevity only five buyouts in the UK involving a premium above £1 billion. insurance – see articles 03 and 04. The core broking team, numbering 22 individuals with 200 years of combined experience, partners with others Evidence continues to emerge of increased take up at Mercer and its sister companies, Marsh and Oliver of member options, encouraged by the Government’s Wyman, to offer a genuine one-stop shop for all advisory introduction in April 2015 of the right of members to take and transactional services in relation to pension buy-ins, money purchase funds as cash from age 55. This has buyouts, and wind-ups. led to increased member interest in electing to transfer from DB to money purchase, when transfer values are set Mercer Pension Risk Exchange® — see article 06 — enables at a generous level and comprehensive member advice is buyers and sellers of bulk annuities to come together to provided. This can be a win-win-win for the sponsoring monitor prices and rapidly transact, a way of interacting employer and trustees (by removing obligations) not seen before, as recognised by both Pensions Age and and members (by offering them benefits options). European Pensions as “Innovation Award of the Year” 2016. Furthermore, a combination of member options, set at a generous level, and annuitisation can successfully 3 UK DB BULK PENSIONS INSURANCE 02. A BUMPY START - £12 BILLION OF BULK ANNUITY TRANSFERS TOOK PLACE IN THE FIRST HALF OF 2016 (BUT ONLY £3 BILLION FROM PENSION SCHEMES) Last year’s £12bn of pension scheme bulk annuity purchases has been almost replicated in just the first half of 2016, but only £3bn of this is from pension schemes and almost all is in respect of pensioners who are already in payment. Solvency II has been the main driver – persuading many life insurers to sell off their legacy annuity books to the active bulk annuity insurers and also creating (temporary) problems for insurers trying to price deferred members. Harry Harper Bulk Pensions Insurance Advisory The second “post Brexit” half of 2016 promises to be Key themes for the second half of the year will be: interesting now that the volume of quotation requests from pension schemes has increased rapidly mid-year. • Volatility in markets: There is potential for significant The nature of the quotation requests is also changing, bulk annuity pricing opportunities to appear, for those in instead of the pensioner only pricing requests from earlier the right place at the right time in 2016, we now see a growing number of exercises that include deferred members. • Freedom and choice: Continued member demand for options provides a key way to reduce overall settlement costs • Deferred member pricing: The wide range of pricing seen for deferred members since the introduction of Solvency II from 1 January 2016 shows indications of stabilising. We see signs of more aggressive pricing for those members in the second half of the year 4 MARKET REVIEW 2016 MARKET SHARE 2008-2014 MARKET SHARE 2015 Scottish Widows 1% 9% 3% 8% Rothesay Life 23% 2% 10% 19% Prudential Pension Insurance Corporation 16% Legal & General 10% 30% Just Retirement / Partnership 12% Aviva 25%31% AEGON BULK ANNUITY BUSINESS VOLUMES 15 250 12 200 9 150 6 100 3 50 0 0 2008 2009 2010 2011 2012 2013 2 014 2015 DEALS OVER £500M £BN PREMIUM VOLUME £BN DEALS UNDER £500M £BN NUMBER OF TRANSACTIONS 5 UK DB BULK PENSIONS INSURANCE KEY THEMES FROM THE LAST 12 MONTHS Insurer pricing Insurer pricing has remained aggressive into 2016 for pensioners in payment,with pricing for these members remaining significantly lower than the cost of backing the same liabilities using gilts. During 2016 we have seen Scottish Widows join three other insurers, Legal & General, Pension Insurance Corporation and Rothesay Life, to write £3 billion of (reported) pensioner in payment business between them during the first half of 2016. Legal & General and Rothesay Life have also taken on, between them, £9 billion of insurer back-book legacy annuities. Overall, the message is clear that regardless of Solvency II, the bulk annuity insurers remain able and keen to write huge transactions, at competitive prices, relative to say the cost of meeting those liabilities using gilts. Large combined deals The largest recent deal was the £2.4 billion buyout by Philips, insured with Pension Insurance Corporation (PIC) in November 2015. Alongside this trade was more than £1.1 billion of the same scheme converted during the year from buy-in to buyout with Rothesay Life and Prudential. The Philips transaction (like the TRW transaction in 2014 that was placed with Legal & General) emphasises the ability to financially re-engineer pension schemes, creating value via a coordinated and combined package that allows members to take valuable options, supported with high-quality financial advice, against a background of annuitisation — more in article 07. Medical Underwriting Last year saw the continuing and growing use of medical underwritten bulk annuities (MUBAs) to broaden the range of solutions being adopted to de-risk pension schemes. We see this continuing in 2016 – more in article 03. 6 MARKET REVIEW 2016 REPORTED 2016 BULK ANNUITY TRANSACTIONS, TO 30 JUNE: £330m pensioners Legal & General ICI (7th tranche) £900m pensioners Pension Insurance Corporation Aon’s own scheme £200m pensioners Scottish Widows Undisclosed scheme £50m pensioners Scottish Widows Barloworld £10m full buyout Pension Insurance Corporation Undisclosed scheme £630m pensioners Scottish Widows ICI (8th tranche) £90m pensioners JRP Group Galliford Tr y £350m (various) Legal & General Several Q2 transactions £750m pensioners Legal & General ICI (9th tranche) £3bn REPORTED 2016 INSURANCE COMPANY BACK-BOOK TRANSFERS, TO 30 JUNE: £6bn pensioners Rothesay Life AEGON’s back-book £3bn pensioners Legal & General AEGON’s back-book £9bn 7 UK DB BULK PENSIONS INSURANCE 03. MEDICAL UNDERWRITING – A KEY TO UNLOCKING OPPORTUNITIES OR THE KEY TO PANDORA’S BOX? The Medically Underwritten Bulk Annuity (“MUBA”) market has developed out of the established individual retail annuity market, with several insurers now offering solutions.
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