Bulk annuity pricing falls amid volatility - XPS

Bulk annuity pricing has fallen as current market volatility is causing rapid shifts in all asset pricing, new research from XPS Pensions has shown.

The firm emphasised that recent market volatility stemming from COVID-19 had made all assets cheaper relative to gilts, noting that this includes, in particular, the assets that insurers buy.

It also highlighted the small number of insurers in the market, explaining that this had seen “considerable downward pressure” on bulk annuity pricing.

Bulk annuity pricing relative to the cost of meeting the same liabilities via gilts is also expected to fall further as the year continues.

XPS Pensions Group head of risk transfer, Harry Harper, explained: “Market volatility is rapidly altering the pricing of all assets and this includes the price of bulk annuities.

“For those schemes that are already holding gilts, bulk annuities are now significantly more affordable than they were and for those schemes holding equities, bulk annuities have become less affordable.

“A driving factor is the economic turmoil which has made the credit assets that insurers buy cheaper, and due to there being eight insurers in the market there is considerable downward pressure on bulk annuity pricing. There has already been evidence of price cuts.”

The firm has also predicted a fall in the volume of bulk annuities to be completed in 2020, compared to 2019.

However, it emphasised that this is still a busy market and urged trustees to request quotations in a way that suit the insurers.

It explained that whilst some larger firms continue to wait 2-3 months for bespoke cases, quotes can be turned around in a couple of weeks where firms are committed to a "fully locked down quotation request data file".

Harper added: “Although it is still early days we are anticipating at least a slight drop in volume for 2020 relative to the £44bn of bulk annuities purchased in 2019, as there are simply not enough large schemes out in the bulk annuity market at the moment to enable a re-run of 2020.

“This small drop could become more significant if schemes with growth based asset strategies now find they need to postpone their end game.”

The COVID-19 pandemic has caused extreme market volatility over the past month, with industry experts describing the current situation as the "perfect storm" for scheme funding.

This also follows analysis by Hymans Robertson, which revealed that DB pension scheme deficits had risen by £100bn in just one week in February.

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