Golden opportunity… in the annuities market for pension schemes primed to transact
The Coronavirus pandemic and associated economic turmoil makes the outlook for 2020 much more uncertain, but for those in a position to proceed this may be a golden opportunity for the following reasons.
Pension schemes continue to mature and, with funding levels generally ticking higher over recent years, the number of schemes looking to buy annuities has soared. In 2017 there were around £12bn of bulk annuity transactions, whereas last year the figure was £40bn. The Coronavirus pandemic and associated economic turmoil makes the outlook for 2020 much more uncertain, but for those in a position to proceed this may be a golden opportunity for the following reasons.
Increased market capacity
The price of anything is simply the balance between supply and demand. Recent events have typically seen funding levels fall and sponsors become more concerned with preserving cash than funding annuity shortfalls, so the demand side of the equation has diminished. On the supply side, insurers went into 2020 expecting another bumper year, and whilst there has been a tightening around the collateral available to back annuity business, the overall balance may have shifted. If you combine an insurer looking for business with a scheme primed to transact, then a great deal potentially awaits.
Widening credit spreads
Credit spreads, the return available on corporate bonds above the risk-free rate, have increased significantly over recent weeks. Of course, higher spreads reflect an increased risk of default or downgrade and there remains no free lunch. But insurers have been able to reflect some of this higher credit spread in their pricing. Other things being equal, a higher credit spread means a higher discount rate and a lower price for insuring pension liabilities.
There are, of course, many other factors to consider when buying annuities beyond just price. Trustees need to conduct due diligence on their preferred insurer, and even if this was done recently, it may need to be refreshed given the world is arguably a very different place to even just a couple of months ago.
The liquidity of the scheme’s assets also needs consideration. Credit and swap markets have been particularly badly affected by the reduction in liquidity and trading costs have increased significantly. Higher transaction costs and the ability to sell assets need to be considered when assessing affordability.
It is undoubtedly a challenging time to be a trustee, but for those in a position to transact and who have the governance resources available, now may be the best opportunity they have seen for some time.
Please contact us if you would like to know how we can support trustees in purchasing annuities or going to buy out.
“It is undoubtedly a challenging time to be a trustee, but for those in a position to transact and who have the governance resources available, now may be the best opportunity they have seen for some time.”
Please note that all material within this communication is produced by River and Mercantile Solutions and is directed at, and intended for, the consideration of Professional clients only. This document constitutes a financial promotion within the meaning of the Financial Services and Markets Act 2000 ("FSMA"). Retail clients must not place any reliance upon the contents.
The information expressed has been provided in good faith and has been prepared using sources considered to be reliable and appropriate. While this information from third parties is believed to be reliable, no representations, guarantees or warranties are made as to the accuracy of information presented, and no responsibility or liability can be accepted for any error, omission or inaccuracy in respect of this. This document may also include our views and expectations, which cannot be taken as fact.
The value of investments and any income generated may go down as well as up and is not guaranteed. An investor may not get back the amount originally invested. Past performance is not a guide to future performance. Changes in exchange rates may have an adverse effect on the value, price or income of investments
Why ESG is essential for Cash Flow Matching success
Why ESG is essential for ...
River and Mercantile’s fiduciary management portfolios integrate ESG as a core component, aiming to identify…5 min read
The gift that keeps on giving: the pivotal role of the Paper & Packaging industry in the transition to a circular economy
The gift that keeps on ...
An argument that it’s possible to find companies with robust growth drivers and stock-specific fundamentals…6 min read