Longevity-hedging deals for company pension schemes could hit £20bn (€26bn) in 2016 despite challenges posed by Solvency II, according to a report by Willis Towers Watson (WTW).

The consultancy predicted a 20% growth in bulk annuity deals in 2016, expecting buy-ins or buyouts covering some £12bn of liabilities versus the £10bn of liabilities transferred to insurers in 2015.

Pensions schemes can expect lower prices and more innovation due to increased competition in the market, according to the advisory company’s 2016 de-risking report.

Canada Life and Scottish Widows entered the market in the second half of 2015, noted WTW, and “we are aware of a number of other companies closely monitoring the development of the market” and likely to develop bulk annuity propositions over the course of 2016. 

The medically underwritten bulk annuity market is likely to grow rapidly this year due to attractive pricing, with a particular interest in top slicing, according to the consultants.

An “unprecedented” number of clients are investigating this market, they said.

Top-slicing involves pension schemes purchasing a bulk annuity to cover those members with high liabilities, to remove concentrated longevity risk.

Shelly Beard, senior de-risking consultant at WTW, said had been a wide range of transaction pricing in the bulk annuity market this year, which the consultants believe is in part because insurers are “price-testing” new positions under Solvency II.

“However, general pricing levels remain strong, and the recent widening of corporate bond spreads has increased affordability for those schemes that have set a price target relative to Gilts,” she said.

The consultants said there was a “high level of activity at what is normally a quiet time of year”, indicating a strong year ahead.

Overall deal values for longevity hedging could reach £20bn in 2016, after £6bn in 2015 and £25bn in 2014, according to the WTW report.

This would be the second-biggest year on record, after 2014, which included a record-breaking £16bn hedge for the BT Pension Scheme. 

This year could witness the first-ever “half-way house” transaction structures, involving top-slicing in the bulk annuity market and longevity swaps to cover the liabilities represented by the remaining population, according to WTW.

This approach is likely to be attractive for those pension schemes “with some Gilts but not enough to annuitise all of their pensioner liabilities”, noted the report.

Solvency II, the EU-wide solvency regulation for insurers that came into effect in January, could pose a challenge for pension schemes longevity hedging this year but is surmountable, according to the consultants.

The problem, to the extent that it becomes one, stems from bulk annuity providers themselves looking to reinsure longevity risk more regularly because the capital-requirement rules of Solvency II makes holding the longevity risk on their books inefficient.

This could mean pension schemes find it more difficult to get traction when reinsurers have limited resources, said the consultants.

However, this potential capacity constraint in 2016 is likely to be operational and is one reinsurers are aware of and building their teams to cope with, Beard said.

“While we may see bottlenecks in certain areas, we do not expect it to have a major impact on the market, and schemes that go to market with clear objectives will continue to achieve good outcomes,” she said.

The onus, according to the report, is on pension schemes to have “a well-thought-out quotation process to maximise reinsurer engagement”.

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