Expectations for 2024 bulk annuity volumes were to be between £45-49bn but are forecast to be in the vicinity of £60bn for 2025 and 2026, surpassing the previous high seen in 2023. Growth in demand is primarily driven by continued growth in the small segment of the market, and a number of particularly large deals.
Core to the discussion was the impact of a run-on to the bulk annuity market. While last year’s Mansion House reforms gave many schemes ‘pause for thought’ when it came to their endgame, the vast majority of those decided to continue with an insurance buy-out. Given the need to generate sufficient investment returns to cover the ongoing cost of running a scheme, it remains the most viable option for schemes with more than £5bn in assets.
Secondary decision factors are becoming increasingly important, after price, given the well-funded status of many pension schemes and trustees’ fiduciary duty to members. With 'financial resilience' of an insurer as a key second-tier factor, the PRA's individual life insurer 'core scenario' stress tests in 2025 may provide defined benefit trustees (and equity market participants) with a more objective measure of balance sheet strength.
Consultants are now seeing more interested insurers per transaction, especially at the smaller end of the market. This dynamic has shifted due to new entrants who are initially focused on <£100m deals as they test their processes and models. Other well established providers have launched streamlined transaction platforms dedicated to processing small schemes.
Finally, while pricing has improved for pension schemes through the latter half of this year, relative to where credit spreads have moved, the impact for insurers has been a reduction in their margins. It is expected that this could persist into 2025, but funded Reinsurance could negate some of the asset risk on account of the access they have to different pools of assets.
