Post-Solvency II bulk annuity deal rush could push up pricing, says expert

Increasing volumes of these legacy annuity book sales could, however, soak up capacity in the bulk annuity market and ultimately impact on pricing, according to pensions law expert Robert Tellwright of Pinsent Masons, the law firm behind Out-Law.com.

"In each of the past two years, insurers have written more than £12 billion worth of bulk annuity policies for pension schemes, and there have been no signs of any capacity constraints," he said. "But when major insurers are acquiring multi-billion pound legacy books, this raises obvious questions about whether recent volumes of new bulk annuity business will be sustainable. In particular, will the insurers be able to attract further capital to support the growing bulk annuity business whilst also acquiring these back books?"

"We are probably some way from any kind of 'capacity crunch', but it will be interesting to see whether deals like this cause any ripples in the pricing generated by the bulk annuity market. Pricing for securing deferred liabilities has already been affected by Solvency II, and if scheme trustees find themselves competing with legacy insurers to offload their pensions risk to another insurer, that could result in pricing becoming more expensive as a result," he said.

The EU's new, harmonised regulatory regime for insurers, called Solvency II, came into force on 1 January 2016. Solvency II increased the amount of capital that European insurers must hold in relation to their liabilities depending on their level of risk, with annuities treated relatively harshly due to the risk that policyholders will live longer than expected.

According to announcements by Aegon and pension insurance specialist Rothesay Life on Monday, the deal will account for two thirds of Aegon's annuity portfolio or around 187,000 policyholders. The transaction will initially take the form of a £6bn reinsurance contract followed by a Part VII transfer of the underlying assets and liabilities to Rothesay Life, subject to regulatory and court approval.

Aegon, which stopped selling annuities in the UK in 2010, said that the transaction would increase its Solvency II capital ratio as of the end of 2015 to an estimated 155% following the reinsurance transaction, and an estimated 165% following the Part VII transfer. The insurer said that it was "exploring options" for transferring the remainder of its UK annuity liabilities.

This is the third time that Rothesay Life has reinsured an active portfolio of annuities in the past 12 months, although the first time it has done so since Solvency II came into force. The company reinsured £1.2bn worth of UK annuities from Zurich in 2015, and already insures pension liabilities for the likes of RSA, British Airways and General Motors.