Aon Hewitt principal consultant John Baines tells EI schemes must get sponsors onside early to make sure they don’t miss de-risking opportunities

EI: How is the bulk annuity market developing?

JB: There has been real growth in the market in recent years. If you go back to 2011, £5bn of business was written, so there has been a doubling of the bulk annuity market since then, and almost a doubling in the number of insurers. It’s a hugely vibrant market.

Pricing continues to be very attractive, particularly for pensioner members. We are seeing a wider range of prices than ever before given the impact of Solvency II. At the top end, the pricing is as good as it has been for a couple of years.


EI: What does this mean for schemes that are looking to transact now? How can they make sure they’re prepared?

JB: This is the question schemes should be focusing on because I’m convinced that at some point there will be a capacity crunch in the bulk annuity market. The amount of schemes that are looking to invest in a bulk annuity at some point compared to the run-rate capacity – the difference is huge.

The typical preparation is to make sure the sponsor is onside: do some training, not just with the trustee board, but with the sponsor as well. It might be that you aren’t looking at a bulk annuity for the next 10 or 15 years, but opportunities arise. We’ve seen it again and again – in 2008, in 2015, in the great pricing we saw in the medically underwritten market – schemes are looking back with regret.

So ensuring the sponsor is onside is important, and so is ensuring you capitalise, with your advisers, on understanding what the pricing could be for your scheme so you can approach the market at the right time.

EI: What about schemes that are not fully funded? Are there options for them to start insuring benefits?

JB: Absolutely. The growing trend, driven somewhat by the potential capacity crunch, also by the appetite from trustees and sponsors to focus on the end game. Looking at the pick up on government bond yields, bulk annuities can be an attractive investment decision if you do slices along the way.

You have to look at which part of the population is attractive, so at the moment we are seeing particularly attractive pricing for the older members, driven by widening corporate bond yields, and we’re seeing attractive pricing in the medically underwritten market for subsets of populations.

Equally, even though it is a risky liability in the deferred population, the pricing is generally relatively expensive so it is no surprise we are seeing fewer transactions there. Focusing on the right transaction for your scheme and the right subsection of members is absolutely essential.