The market for transferring pension risk could total up to $10 billion over the next three years, according to a new report from Eckler Ltd.
In fact, some estimates see risk transfers over that time frame reaching $15 billion, the report, based on interviews with insurers active in the pension annuity market, noted.
According to the Eckler report, the annual size of the market for pension risk transfers reached $2.7 billion in 2016, with this year looking to break records as well. Activity from ongoing pension plans has been a big factor, as has the growing prevalence of buy-in annuities.
As the market grows, providers have been introducing new products, according to Eckler, which cited the first buy-in annuity, valued at $45 million, covering active future benefits this year, as well as a particularly large transaction totalling $900 million in 2017.
The report referred to longevity insurance as a particularly significant development. The approach, it noted, allows plan sponsors to target longevity issues while addressing other pension risks, such as interest rates, through alternatives such as liability-driven investing. Key factors in a couple of recent transactions, including the absence of collateral and simplified contracting, have been notable, the report noted. Also significant has been the emergence of inflation-linked annuities, according to Eckler.
In terms of some of the factors encouraging plan sponsors to be more open to annuities, the report noted decreased worries about pension obligations reverting to them if an insurer becomes insolvent. At the same time, plan sponsors that have improved their funded status through past de-risking efforts are considering transferring pension risk as the final step, according to the report.
While the report noted that other factors, such as the entry of reinsurers into the market, will also be favourable for annuity growth, it cautioned that plans sponsors need to be cautious when considering larger transactions. The reasons include the lower number of players active in the larger end of the market and the potential need to deal with reinsurers. But there are advantages to bigger deals, including the ability to free up resources and reduce costs, according to Eckler.
“The added challenges and complexity of very large buy-in and buy-out transactions means potentially higher pricing for transferring risk relative to smaller, more straightforward transactions,” the report stated.
“However, by carefully accounting for the considerations of larger transactions and taking a holistic view of the costs and benefits, plan sponsors may determine that transferring risk in a single transaction is the ideal solution.”