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Pension risk transfer hits record £38B in 2014, more to come in 2015


The volume of risk laid off in the pension risk transfer market reached a record level in 2014, according to consultancy Hymans Robertson, with £38 billion of deals completed, including a record £25.4 billion of longevity swaps.

The appetite to lay off risk from pension funds has been steadily increasing over recent years, but 2014 saw a number of very large longevity swaps and reinsurance deals completed which took the year to a record. Details of all of the longevity related pension risk transfer deals can be found in our longevity swaps and risk transfer directory.

The previous annual record, set in 2013, for pension risk transfer stood at less than half the 2014 total at £16.4 billion. The fourth-quarter of 2014 helped to propel the year to its record, with £8 billion of deals closing the year.

James Mullins, Head of Buy-Out Solutions at Hymans Robertson, commented on the record year; “2014 was a bumper year for the risk transfer market, with total deals exceeding £38bn. This significant uptake in deals has been driven by three factors. First, insurance companies are keener than ever to complete bulk annuity deals to replace lost revenue from individual annuity sales, due to the pension freedoms announced in last year’s Budget. Second, we continue to see strong appetite from global reinsurance companies to take on UK longevity risk. This means the cost of removing life expectancy risk via a longevity swap or bulk annuity remains at attractive levels. And finally, the continued volatility in pension schemes’ financial positions means that they are keener than ever to transfer risks to insurance companies.”

As a result of this record year of risk transfer, insurance and reinsurance companies now hold the risk associated with a huge £110 billion worth of pension scheme liabilities, which impressively is equivalent to 6.5% of all defined benefit pension scheme liabilities.

Mullins continued; ““The majority of the deals, by value, across the year were driven by longevity swaps and large bulk annuity deals, areas that we expect to see continued growth in 2015. However, the end of 2014 also saw an upsurge in more niche buy-in deals. Over £500m worth of medically underwritten deals took place in the fourth quarter, which was over 10% of all bulk annuity transactions in Q4 2014. This is an area that we expect to see particular growth in 2015, with attractive pricing putting deals over 5% cheaper than traditional buy-in deals.

“The decision on when to de-risk is something that is moving higher up the agenda for pension scheme managers and trustees. Last year, our research found that 30% of trustees believe having a clear understanding of scheme risks and when to de-risk is the biggest single challenge they face. The significant competition from insurance and reinsurance companies means that pension schemes who are broking the market now will be pleasantly surprised with the attractive current pricing of both buy-ins and longevity swaps.”

For the year ahead Hymans Robertson expects continued strong levels of activity in the pension risk transfer and longevity risk transfer market. Further growth in the use of longevity swaps is also expected, particularly as new structures have enabled pension schemes to access reinsurance capacity more cheaply recently.

Aon Hewitt recently said that it expects to see around £20 billion of longevity swaps in 2015 and Hymans Robertson agrees that further strong use of these structures and transactions is to be expected.

“Hymans Robertson therefore expects to see close to £15 billion of bulk annuity transactions during 2015, including around £1 billion from medically underwritten buy-ins. In addition, we expect that the longevity swap market will continue to grow at pace,” Mullins said.

Read about the majority of longevity related pension risk transfer deals in our directory of major longevity swap, longevity reinsurance and risk transfer transactions.

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