* New players set to enter bulk annuity market
* Biggest deal to date was 3 billion pound buy-in in March
* Standard Life's annuity sales fall 50 percent since budget
By Jemima Kelly
LONDON, May 6 Insurers hit by a UK government
shake-up of pension rules are set to make up some of their lost
business by ramping up the number of retirement deals they sell
to companies rather than individuals.
The industry was dealt a surprise blow in the March budget
after retirees with pensions reliant on financial market
returns, so-called defined contribution schemes, were told that
from April 2015 they would no longer have to buy an annuity, or
income for life, at retirement.
For insurers with a big annuity business, such as Resolution
and Legal & General, this raised fears of a
slide in profits. Resolution's shares have plunged 15 percent
since the budget and those of L&G, which last year generated 29
percent of cash flow from its retirement division, 8 percent.
The full impact will not be known until the changes come
into force, though Standard Life said last Wednesday that
sales of annuities, which accounted for 6 percent of the group's
operating profit in 2013, had already fallen by 50 percent in
the weeks following the budget.
But the blow could be softened by demand from defined
benefit - or final salary - pension schemes, many of which are
seeking to hive off their exposure to the risk that scheme
members live longer than expected or that interest rates rise,
in so-called "bulk-annuity" deals.
The Pension Protection Fund reckons total liabilities in UK
final salary schemes top 1.2 trillion pounds ($2 trillion),
almost the size of the UK economy.
This year has already seen a record-breaking 3 billion pound
deal between L&G and now defunct chemicals firm
"You're going to have to sell quite a lot of individual
annuities to make that kind of money," said Martin Membery, head
of insurance at law firm Sidley Austin. "So you can see why
these types of deals could be almost a direct replacement for
what they're otherwise losing."
While companies can write a derivative contract to remove
their exposure to the old-age concern in a so-called longevity
swap, insurers will be hoping they opt for the bulk annuity
deals, which are more profitable and give the insurer all the
assets upfront to invest.
In such deals, the pension scheme sheds responsibility for
paying its members their retirement income, either through a
buy-out, where the insurer takes over everything, or a buy-in,
where the scheme remains the administrator.
The demand for bulk annuities is already strong, with a
record 7.5 billion pounds ($12.7 billion) of deals struck in
While the first bulk annuity deals were agreed in the 1980s,
tougher accounting standards and EU funding requirements, as
well an increasing number of final salary schemes closing, have
combined to drive up demand from pension schemes.
Consultant Hymans Robertson expects at least 20 billion
pounds of bulk annuities to be written in 2014 and more than
that next year. 18 FTSE 100 firms have taken part in
such pension scheme risk transfer deals, and the consultancy
expects that number to increase to 50 by 2017.
If that's right, Membery said, there will be a "massive
amount of activity" over the next few years. He also pointed
out, though, that the market is finite - with final salary
schemes being phased out, bulk annuity deals can only live as
long as their members.
So far the bulk annuity market has been dominated by a
handful of players - last year just eight insurers wrote 186
deals - but that could be set to change.
"Besides those insurers which already operate... we also
expect there to be a number of new entrants to the bulk annuity
market," said Sadie Hayes, transaction specialist at consultant
That extra competition will bring its own pressures, though.
"In my mind it's absolutely clear that, in the short and
medium term, the impact of the budget will be to reduce bulk
annuity pricing," said James Mullins, a partner at Hymans
Robertson, citing an insurer currently finalising a "good-sized"
deal that lowered its offer price by 3 percent after the budget.
But L&G, which wrote 1.3 billion pounds of bulk annuity
deals in 2013, said high demand from pension schemes for buy-ins
and buy-outs would keep pricing high.
"I don't think it (the budget) is causing any margin
pressure," said Tom Ground, L&G's head of bulk annuities.
"We're expecting to see certainly good margins, if not
improving margins, on the bulk side given the number of
opportunities coming to the market."
($1 = 0.5919 British Pounds)
(Editing by Simon Jessop and Elaine Hardcastle)