Bulk annuity market poised for record-breaking year

As we navigate through 2024, the bulk annuity market is showing signs of unprecedented growth. At Barnett Waddingham (BW), we predicted this year's business volumes would challenge the 2023 record of £49.1bn. 

Now, as we enter the second half of the year, we offer our insights on market trends and what pension scheme trustees and managers can expect in the coming months.

Market overview: setting the stage for success

The bulk annuity market has demonstrated remarkable resilience and growth in 2024. Including Rothesay's £6bn purchase of Scottish Widows' back book (subject to regulatory approval), approximately £22bn of business has either been written or is in exclusivity.

While the first half of the year saw some delays in large transaction approaches, the market is now heating up for a strong finish. We project full-year volumes to comfortably exceed £40bn, with the exact timing and structure of large and mega transactions serving as the key driver.

Large transactions: adapting to market demands

The landscape for large transactions has evolved significantly in 2024. May and June saw £15bn-£20bn of deals being actively priced. We anticipate that some of the jumbo schemes in the market will seek to transact in multiple tranches (e.g. by splitting into £5bn buckets) to increase insurer participation and help meet price targets.

This approach could significantly impact transaction volumes which will ultimately depend on whether these deals are completed in 2024 or 2025, and potentially pricing levels if these schemes are willing to wait for their price targets to be met.

Small scheme market: breaking new ground

The small scheme market has been a hotbed of activity in 2024, with insurers innovating to meet growing demand. Just Group reached a milestone of 400 transactions since its formation in 2012 and projects over 100 deals in 2024 alone. This remarkable growth represents a 250% increase in their transaction numbers in just three years.

The small scheme market is thriving, with new streamlined propositions from Aviva (Clarity) and PIC (Mosaic) joining established offerings from Just (Beacon) and L&G (Flow). Given this continued growth and support, we expect 2024 to be a record-breaking year in terms of the number of transactions completed, with activity set to accelerate into 2025 and beyond.

Changing market conditions

The bulk annuity market has shown resilience in the face of changing economic conditions. Despite narrowing corporate bond spreads (from 1.75% pa in March 2023 to around 1% pa) some insurers have been able to maintain pricing relative to gilts at the levels seen in late 2023.

Given the direct link between nominal gilt yields and premiums (with higher yields resulting in lower premiums and vice versa), the c. 0.5% pa increase in nominal gilt yields over the year to date has acted to reduce premium amounts (by up to c. 10%). The direction of travel and magnitude of any yield changes could therefore be a key influence on whether the total business written reaches the £50bn mark.

Growing insurer capacity

Over the first half of 2024, we've seen an increase in the number of insurers willing to participate in a typical process. This additional capacity should provide greater flexibility for the market to service particular peaks in demand. As new insurers start to quote and look to land their first transactions, there's also potential for increased competition.

Key takeaways

In this dynamic market, pension scheme trustees and managers  should ensure they are in a position to act quickly, with those schemes that are well-prepared positioned to maximise insurer engagement.

"The key drivers of where the volumes land will be the exact timing of some large transactions and the manner in which markets move over the remainder of 2024."

As we look ahead to the remainder of 2024, it is clear that we will continue to see records broken in the small scheme space thanks to the growth of streamlined insurer solutions. It remains to be seen when the large deals in the market will transact in 2024 and whether they will push premiums towards the levels seen in 2023.