The Future Of Bulk Annuities

Since the Chancellor’s budget came out last week, there has been much in the press on the imminent decline of annuity providers. In fact, over the past two weeks we have seen stock prices of the pure-play annuity providers get cut in half or more. After all, now that pensioners have a choice, why would they opt to purchase annuities when there are so many other options – both existing and under development – that present better value for money?

Don’t fret, say the writers of bulk annuity business, companies winding up defined benefit pension schemes will still have large appetites for their products. In fact, many are predicting a banner year for bulk annuity sales. This is driven by the desperation of companies to offload their pension schemes from their balance sheets.

But if individual annuities are clearly not good value for money, what makes bulk annuities any better? After all, bulk annuity providers are for-profit enterprises which are able to book a tidy upfront profit the day they close a deal.

We believe it is only a matter of time before trustees and sponsors realise that they are paying up for transferring risk to insurance companies and that more cost-effective ways of offloading their liabilities are being developed. For instance, sponsors are setting up third-party managed, captive insurance vehicles which dramatically lower the cost of insurance. This is a strategy that plays off the massive success of captive insurance strategies which dramatically changed the face of the insurance market decades ago.

Is it only a matter of time before bulk annuity businesses suffer the same fate as their individual annuity brethren?