Updated perspectives on the bulk annuity market – June 2014

Lloyd Richards contributed to the writing of this blog post

We last gave our updated perspectives on the bulk annuity market in March where we talked about growth among the players, the market exit of the underdog MetLife, and the divergence of the new entrants Partnership and Just Retirement.

There have been many changes since that article; in fact the very day we published it saw (according to George Osborne) “the most far-reaching reform to the taxation of pensions since the regime was introduced in 1921.” The immediate impact was plummeting share prices as £4.4bn was wiped off the value of UK life insurers. Legal & General has said it expects the individual annuity market to contract from around £13bn p.a. to less than £3bn p.a.

With bulk annuity business volumes in 2014 having already set a new record, those insurers with a proven track record are stepping up to compensate for the expected loss of individual business by competing for bulk business like never before.

Gentlemen; take your corners

The seven leading firms have begun to carve out clear positions for themselves. The graph below shows average transaction value against the number of transactions for each of the insurers active in the bulk annuity market, for transactions between 1 Jan 2013 and 31 March 2014:

We can see a clear 4-way split in the market which is being driven by the strategy of each group of firms:

• The “competitive for everything” pair: Over the period looked at, L&G and PIC dominated the market, sharing between them 69% of transactions by value and 44% by volume. L&G’s particular coup was the £3bn buy-in of the ICI pension scheme. 
• The high value hunters: Rothesay Life and Prudential have established reputations of targeting larger transactions. Despite only picking up 5% of all transactions they accounted for around a quarter of the market by value.
• The small scheme specialist: Aviva achieved a huge volume of transactions at the smaller end of the market, picking up around 40% of schemes. Aviva has indicated that it will be looking at larger schemes in future. Legal and General is also a significant small scheme player, writing large volumes of business in this quadrant.
• The medical underwriters: Partnership and Just Retirement are slowly growing their medically underwritten offering and it feels as though every couple of months one of them sets a new record for the largest medically underwritten transaction.

On the ropes

There is no doubt that the 2014 Budget will lead to fewer individuals buying annuities, although the extent to which this affects total business volumes is yet to be seen. For most of the insurers operating in the bulk annuity market individual annuities are a significant business line and these companies will have to seriously rethink their retirement product offerings. Any impact on the the monoline bulk annuity insurers may be limited, although the government is still consulting on whether members of defined benefit schemes will be allowed to take the value of their benefits as cash on retirement if so desired.

Down, but not out

Fortunately for life insurers there is some mitigation with auto-enrolment on the horizon; even though a lower proportion will choose to annuitise in future there will be far more people with pension pots, and some of them will be expected to purchase annuities.

The insurers themselves are coming back fighting; by developing a raft of new products to meet changing retirement needs, such as:

• Fixed-term annuities
• Surrenderable annuities
• With-profits annuities
• Drawdown products

New blood

Annuity providers who are not currently competing for bulk annuity business may be eyeing up the amount and size of transactions with an intention to move into the market. It isn’t hard to see why: L&G expect the Budget to cause the individual annuity market to shrink to below £3bn p.a., whilst the bulk annuity market has seen a single transaction of that size. The chance to outperform individual annuity sales with only one or two transactions is a tempting prize for any insurer, and entirely accessible for those selling individual annuities since the business is fundamentally very similar once annuities are in payment.

And the winner is…

In the record-breaking bulk annuity market there is more than one clear winning strategy. All the active insurers have had huge successes over the past 15 months, writing record volumes of business or establishing medical underwriting as a recognised option for smaller schemes. 2014 continues to be a successful year for all involved, even if for those selling individual annuities the victory appears somewhat pyrrhic.

It will be interesting to see where new entrants will position themselves in the market. One mistake of the early failures was to immediately target larger schemes without first building up a reputation. Expect the next bulk annuity provider to learn from this and position itself initially at the smaller end or with a medically underwritten offering: starting out on the left of our graph and seeking to up the value of their transactions once a proven track record is established.