The pension de-risking market is currently growing at its fastest rate in recent years, due to it being at its most affordable within the past decade, an expert said.
“We foresee an unusual number of longevity reinsurance deals worth £1 billion to £4 billion (US$1.3 billion to US$5.17 billion) that are in the market in 2018,” said Amy Kessler, head of longevity risk transfer at Prudential Financial, in her market forecast for the next 12 months.
“This affordability of pension buy-ins and buyouts is due in part to the solid alignment between growing market demand and the industry’s increasing capacity. It is also aided by the funded status of UK pensions, which, on average, were fully funded in the summer of 2018.”
New players have been entering this market, including primary insurers and reinsurers, Kessler said, and this is benefiting the industry.
“These new participants, including Scottish Widows and Phoenix, are adding additional capital and market capacity,” she said. “In addition, Aviva has increased its focus on this market, bringing substantial capital and a much larger team. And although overall competition is vibrant, the market is not overly competitive, as demand for de-risking solutions continues to grow.”
Kessler outlined two factors which keep prices affordable – the addition of new asset strategies, such as the use of new illiquid asset classes, including securitisation of wind and solar energy; and longevity improving at a slower pace than the historic average.
She explained that the slowdown in longevity improvement is a return to normalcy, following simultaneous health advances between 2000 and 2010, such as smoking reduction, stents, and statins. There was also a confluence of improvements that made the pace of longevity gains in subsequent years harder to match.
However, the pace of longevity improvement may speed up again in the future as new advances in medical science emerge.
The market for pension de-risking is globalising by expanding beyond the US and the UK, according to Kessler.
“In recent months, there have been two notable pension risk transfers in Germany, together worth more than US$5 billion,” she said. “We expect this type of activity to grow. This progress builds on the development of pension de-risking markets in other countries, such as Canada and the Netherlands. Some of these efforts are being led by multinational companies that have pensions in several countries around the world.”
However, Kessler warned that the recent combination of rising interest rates and equity prices is unlikely to last.
“Right now, the average corporate pension fund in the UK, the US, and Canada is at or near full-funding, which represents a marked improvement over the last two years,” she said. “Leading pension schemes are taking advantage of this favourable environment by locking in gains and transferring risk, with the knowledge that such advantageous markets are always fleeting.”
As a result, Kessler said that it’s better to act now than to wait further in the hope for lower prices.
“Managing high-risk market positions requires navigating the volatility of markets, interest rates and currencies, all of which are compounded by longevity risk,” she said. “Pension risk transfer, by contrast, is an all-weather strategy for managing such risks.”
