Pensioner insurance opportunity to purchase bulk annuities financed from UK gilts

Colin Parnell, 09 March 2016

Insurance prices, especially for current pensioner liabilities, have improved relative to UK government bonds (gilts) during the last year.

As a result, the cost of insuring current pensioner liabilities through the purchase of a bulk purchase annuity policy may be less than the cost of matching the same liabilities using government bonds. However, the costs may still be higher than Technical Provisions where a margin above gilt yields is used to value the liabilities for funding purposes and/or the longevity assumptions may be less prudent than an insurer’s view.

This relative improvement may present an opportunity for Trustees to sell investments in government bonds and to purchase a bulk purchase annuity policy without impacting the pension scheme’s anticipated future investment returns and the level of company contributions. The bulk annuity policy also offers the benefit of protection against rising life expectancy.

The graph below shows that, as at 31 January 2016 the cost of insuring in-payment pension benefits is circa 98 per cent of the equivalent liability value, assuming that the liabilities are matched by government bonds.

At the start of 2016, the funding positions of many schemes have deteriorated as a result of falling equity values and falling bond yields. However, longer-dated gilts have increased in value, which may enable trustees to purchase a bulk annuity policy at a lower price relative to a year ago. Many market commentators are anticipating greater volatility in gilt yields and UK credit spreads over the next few months due to the potential uncertainty associated with a number of global and domestic factors, including the EU referendum vote. This could lead to good bulk annuity opportunities for those clients who are well prepared. By running a competitive process, or perhaps using medical underwriting across the pensioner membership, more favourable pricing might be achieved.

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About the author

Colin Parnell Head of Bulk Annuities

 Colin Parnell

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