23 February 2010
Published in: Longevity - mortality
BMW pension buy-out challenges bulk annuity market
Yesterday's announcement that Abbey Life, the insurance subsidiary of Deutsche Bank, had completed a £3bn longevity swap for the BMW (UK) operations pension scheme [see IERM, Longevity/mortality, 2 February 2009, "Deutsche Bank and BMW in £3bn longevity hedge"] provides a number of pointers to the future, according to Sanford C Bernstein in London.
Bernstein said this type of deal -- which protects BMW UK only from the risk that scheme members live longer than expected, as opposed to a full transfer of scheme assets and liabilities (a traditional bulk buy-out) -- is becoming increasingly popular among companies with defined benefit schemes they want to offload.
"However," Bernstein added, "while this is good for bulk transfer volumes, such deals are much lower margin than the traditional buy-out market. Press reports suggest that the premium paid by BMW was a mere 5% of liabilities, which compares to the 35-50% margin that insurers could command on full buy-out transfers (in the 2006/2007 heyday)."
Bernstein went on to say: "Aside from the potential damage that Solvency II may do to Legal & General, it is the changing face of the bulk annuity market (i.e. increasing longevity swap deals) and whether or not L & G can compete in this market that also makes us wary about the profitability of L & G's core annuity franchise going forwards."