Solvency II 'won't blunt appetite for pension de-risking'

Last year was relatively quiet for the bulk-annuity and longevity-hedging markets compared to 2014, but appetite from both pension schemes and insurers picked up towards the year-end reports Willis Towers Watson.

The advisory and broking group – formed recently when the US$18bn merger between Willis Group and Towers Watson completed – reports that in the fourth quarter of 2015 over £5bn of liabilities were secured with insurers, either via longevity hedges or bulk annuities.

It forecasts that 2016 will start relatively slowly for the bulk-annuity and longevity-hedging markets but will pick up around spring.

“While most insurers spent much of 2015 preparing for Solvency II, final sign-off on reserving requirements was not provided by the [UK] Prudential Regulation Authority (PRA) until December 2015,” said Shelly Beard, senior consultant in Willis Towers Watson’s de-risking team.

“This means that as insurers start to submit responses to quotation processes in early 2016, there will inevitably be a period of price discovery for both pension schemes and insurers, as the market looks to understand how different players have been affected by the new reserving rules.

“Our current understanding is that, overall, there will be very little impact on buy-in pricing for pensioners, but pricing for non-pensioners could increase by up to 5%, although this will vary across insurers. However, we do not expect this to limit the growth of the market in 2016 as, to date, non-pensioners have only represented a small part of bulk annuities secured.”

Willis Towers Watson estimates longevity-hedging deals covering over £20bn of liabilities in 2016. In the bulk-annuity market, allowing for the bedding-in of Solvency II, it expects continued growth during the year with around £12bn of liabilities transferring to insurers. It also predicts increased competition in the bulk-annuity market during 2016.

“Two new insurers completed deals in the second half of 2015 in the small- to medium-sized transaction market and we expect there are several other companies closely monitoring the marketplace with a view to developing bulk-annuity propositions.

“In addition, there is currently significant interest in the UK bulk-annuity market from potential suppliers of capital, which will allow both existing providers and new entrants to continue to write sizeable new business. This can only be a positive development from pension schemes’ perspectives, with new entrants driving prices down and innovation up.”

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