Bulk annuity market bottoming out?

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1 UK press release Bulk annuity market bottoming out? Value of deals down over 3% compared with previous quarter Big deals absent but activity remains resilient up to 1 million Market remains competitive with 7 insurers writing business in the quarter Longevity hedging to the fore LONDON, 1 August 29 The insured bulk annuity market for defined benefit (DB) pension schemes continues to decline, with a 32% reduction in the value of deals done in the second three months of 29 compared to the previous quarter, according to research from Aon Consulting, the leading employee risk and benefits management firm. This reflects a dearth of very large scheme transactions compared with the high point in 28, but there is still a reasonable level of activity amongst smaller schemes. Aon Consulting s Q2 bulk annuity survey is based on information provided by leading insurers. The value of business placed in Q2 29 was 67m (compared to 888m in the previous quarter), down for the fourth quarter running. Despite this, the number of cases placed was little changed at 4, compared to 44 in the previous quarter. The largest case in the public domain during Q2 29 was the second tranche of Dairy Crest pensioners at 17m small compared to some of the mega-deals of last year. There continues to be a competitive market, however, with 7 insurers writing business in the quarter. Commenting on the latest data and market trends, Paul Belok, principal & actuary at Aon Consulting, said: Given the continuing volatility in investment markets, it is arguably not surprising that the level of business written has dropped again this quarter. Despite this, activity remains well above what was seen before the explosion of interest that occurred at the end of 27, and we have seen considerable resilience in the number of cases transacting up to about 1 million. We are also aware of larger deals that are under serious consideration that could well conclude prior to year end, which suggests that the market could be close to picking up once again. We anticipate that a number of schemes that looked at this market last year will start to reconsider the situation, particularly in relation to pensioner buyins, driven by a number of factors including: Early signs of stabilisation in investment markets A continuing opportunity to secure pensioner liabilities at close to (or below) the funding reserve Increased focus on developing a road map to scheme closure, incorporating phased bulk annuity purchases Pick-up in M&A activity where there is a need to tidy up the related pension obligations Risk Management Insurance and Reinsurance Brokerage Human Capital & Management Consulting Outsourcing

2 Page 2 of 5 The economic downturn is also inevitably leading to an increase in insolvency situations. Whilst some of these will result in the scheme assets and liabilities transferring to the Pension Protection Fund, those with better funded schemes will ultimately end up in the bulk annuity market (although the complexity of scheme wind-ups means that this effect will take some time to feed through). Longevity hedging Belok continues: For larger schemes which are looking at de-risking it makes sense to consider alternative approaches as well as the bulk annuity market. The option to use investment vehicles to hedge interest rate and inflation risks has been available for some time, but more recently we have seen hedges to cover the risk of members living longer than anticipated put in place by both Babcock and RSA. When combined with investment in bonds or swaps to match projected pensioner payments, schemes can effectively now create their own synthetic annuities. These longevity hedges are structured as a swap with the schemes paying a pre-determined set of cashflows for up to 5 years, and in exchange receiving each year the amount needed to pay pensions taking account of the actual scheme mortality experience. Ensuring that these arrangements meet a scheme s needs is complex, and particular attention needs to be paid to the counter-party risk, the collateralisation issues and the ability to transfer/surrender in future (for example in the event of wishing to buy out). Broadly similar arrangements can be secured as swaps with banks or as policies with insurance companies, However, it is interesting to note that whilst different providers have been involved with the deals that have been completed to date, these have been on a largely or fully reinsured basis, with the same reinsurer being used in both cases. Without new parties being prepared to take on the ultimate risk, the capacity (and competitiveness) of this market may be limited. Quarter Two Results Graph 1: Number and value of business placed Risk Management Insurance and Reinsurance Brokerage Human Capital & Management Consulting Outsourcing 2

3 Page 3 of 5 Number of cases Quarterly Average 26 Quarter 1 27 Quarter 2 27 Quarter 3 27 Quarter 4 27 Quarter 1 28 Quarter 2 28 Quarter 3 28 Quarter 4 28 Quarter 1 29 Quarter , 2,5 2, 1,5 1, 5 Value of cases ( million) Cases Value ( million) Business placed relates to cases where the initial transfer of assets to the insurer has occurred The average value per scheme placed was down on the previous quarter, from 2 million to approximately 15 million per scheme. Quotation activity The number of quotations being provided, an indication of potential future business levels in the bulk annuity market, is also reducing. The second quarter of 29 saw 275 cases quoted (compared to 385 in the previous quarter), with the total value of these schemes being 24 billion (down from 49 billion). Graph 2: Number and value of quotations being provided Risk Management Insurance and Reinsurance Brokerage Human Capital & Management Consulting Outsourcing 3

4 Page 4 of 5 Number of cases Quarterly Average 26 Quarter 1 27 Quarter 2 27 Quarter 3 27 Quarter 4 27 Quarter 1 28 Quarter 2 28 Quarter 3 28 Quarter 4 28 Quarter 1 29 Quarter Value of cases ( billion) Cases Value ( billion) Figures will include duplication relating to schemes which approached more than one insurer Ends For more information: Leo Wood / Josephine Corbett / 25; +44 () / +44 () leo.wood@fd.com / josephine.corbett@fd.com Alexandra Lewis Alexandra.Lewis@aon.co.uk About Aon Consulting Aon Consulting Worldwide is among the top global human capital consulting firms, with 28 revenues of $1.358 billion and more than 6,3 professionals in 117 offices worldwide. Aon Consulting works with organisations to improve business performance and shape the workplace of the future through employee benefits, talent management and rewards strategies and solutions. Aon Consulting was named the best Risk Management Insurance and Reinsurance Brokerage Human Capital & Management Consulting Outsourcing 4

5 Page 5 of 5 employee benefit consulting firm by the readers of Business Insurance magazine in 26, 27 and 28. For more information on Aon, please visit Safe Harbour Statement: Aon Consulting Limited is authorised and regulated by the Financial Services Authority Risk Management Insurance and Reinsurance Brokerage Human Capital & Management Consulting Outsourcing 5