For much of the past decade, the annuities market looked to be heading towards becoming a historical footnote as low interest rates made their guaranteed incomes look meagre, as investors sought out corporate bonds, equities, private crowd-funded lending – literally anything to generate the income on invested capital that annuities could not. Now that interest rates in the UK are marching upwards, the attraction of the guaranteed income that annuities offer has caught the eye of pension fund managers, with follow-on benefits for providers of bulk annuities in the life assurance industry and the companies looking to offload pension liabilities after years of having to support underfunded defined-benefit pension schemes.
At this point, shifting everything into a bulk annuity becomes feasible and, like the equivalent annuity for an individual investor, guarantees a stream of income so that the scheme can meet its obligations. This is clearly easier to do when interest rates are higher. The Prudential Regulation Authority (PRA) noted the rise of bulk annuities earlier this year in the context of risk management, with insurers writing larger volumes of business as pensions funds moved into surplus. "To be successful in both over the medium to long term, insurers’ senior managers need to exercise moderation in the short term," said Charlotte Gerken, the PRA's executive director for insurance supervision. "Their decisions today commit them and their successors to pay pensions for many decades to come."
BP (BP.) is the latest high-profile pension scheme to explore shifting its liabilities onto the bulk annuities market. Recent reports say that the company is in discussions over a buy-in for its mammoth £30bn pension scheme. If an agreement is reached and a buy-in takes place, it will be the biggest in the history of the annuities market.