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Off-the-shelf solutions drive cost-efficiency in longevity hedging and bulk annuities

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Pre-negotiated legal contracts and standardised off-the-shelf processes are two of the major evolutionary developments that are continuing to shape the longevity hedging and bulk annuity markets, according to Willis Towers Watson’s annual De-risking Report.

The streamlining process allows smaller schemes, which have historically incurred proportionately higher costs and expenses in the insurance market, to benefit from improved pricing and enhanced commercial terms for longevity hedging, whilst also providing larger schemes with a framework that can also be leveraged for much larger transactions, the firm says.
 
Whilst pre-negotiated terms may not always be the ideal solution for larger schemes seeking greater control, the creation and implementation of more standardised approaches means that previously challenging transactions are now becoming “business-as-usual” events.
 
In addition to this development in the longevity hedging market, an increased number of schemes that have previously transacted buy-ins are completing follow up transactions. These schemes can typically react quickly to pricing opportunities as they have the governance and operational frameworks in place, the report says.
 
Other developments over the past year have combined to provide more affordable de-risking opportunities. These included a short-term widening of credit spreads in the immediate aftermath of the Brexit referendum, and the subsequent weakening of the pound, improving the affordability of de-risking options for pension funds with overseas sponsors.
 
Shelly Beard (pictured), director of transactions at Willis Towers Watson, says: “An analysis of the pricing received on the bulk annuities we advised on in 2016 indicated a significant pick up in price attractiveness in the second half of the year. In addition to the streamlining of processes, and favourable exchange conditions for overseas sponsors, commercial considerations came into play for many insurers looking to achieve their annual targets after a sluggish start to the year.”

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