Bulk Annuity Market Update

17 May 2017

Market Activity

JLT’s own experience of 2016 was that the year was very back-end-loaded in terms of the distribution of bulk annuity transactions, more so than any previous year. 2016 ended with an incredible two months as the hard work over the year by all parties (trustees, companies and insurers included) came to a dramatic and rewarding end with a high number successful transactions completed.

On top of the bulk annuities written with pension schemes, the same insurers took on a further £11bn of back-book annuity transfers from closed insurers over 2016. This puts the total size of annuity liability bulk transfers during 2016 at a little over £21bn. The bulk annuity market fortunately seems be coping robustly with this high pace of risk transfer.

During the year we were sad to see Prudential withdraw from the bulk annuity market, but pleased that Scottish Widows could step in and take a significant and consistent market share, helping to maintain and expand the overall capacity in the market. Scottish Widows’ new ability to quote for deferred as well as current pensioners is also positive for schemes looking at full buyout.

Phoenix Life completed a large £1.2bn deal on its own pension scheme at the very end of 2016, unwinding a longevity swap it struck in 2014.

Less positive is the large c£50bn of legacy annuity books that have now been stranded in some closed insurers. This legacy liability could cause temporary capacity problems if too much of it were to transfer too quickly to the currently active bulk annuity insurers, on top of the £11bn of legacy annuities that we have already seen transferred in this way during 2016.

LARGEST DEALS

BuyOut Market Watch May 2017 tables

BHS - PROVIDING MORE THAN PPF BENEFITS

The BHS saga has exposed to the public a long established UK corporate practice, of borrowing money, paying a dividend to shareholder(s) and leaving the company to repay the debt out of its future profits. This can cause problems for pension schemes, as there is inevitably less money left to make good the deficit in the pension scheme funding. The Government and Philip Green have found a solution of sorts in the case of BHS, namely to persuade Philip Green to make a contribution of £363m to help fill the black hole in the pension scheme. BHS members might now reasonably hope to receive something broadly close to their original pension promise when they retire.

Looking beyond BHS, the same scenario of a reduced strength employer (due to contraction over time or large corporate debts) versus a large pension scheme deficit continues to play out across the rest of the industry but without the benefit of Philip Green’s £363m.

If and when a company fails, its pension scheme will try and purchase a bulk annuity policy covering more than the PPF level of compensation. In our experience these are difficult and highly technical annuitisation and winding-up processes that require specialist skills and a proven track record to complete them.

ALMOST 10% OF FTSE 250 COMPANIES ARE VICTIMS OF A PENSION DRAG

Twenty three FTSE 250 companies would need to make pension contributions of more than two years’ dividends in order to repay the pension deficit they have disclosed in their accounts.

This significant payment is likely to need spreading over a greater number of years, but such a payment will still not remove the large pension risks that these companies face.

Large pension risk is a stubborn problem, one that will need to be tackled at some point and on occasion may involve the purchase of annuities. To illustrate the scale of the problem, some twenty of the FTSE 250 companies have total disclosed pension liabilities that are greater than their own equity market capitalisation.

Click here for the full JLT Employee Benefits analysis of the FTSE 250 and their pension disclosures.

For more information, please contact Harry Harper, Director and Head of Buyouts at harry_harper@jltgroup.com.