Aviva chief warns on pensions insurance returns
Pedestrians walk past an Aviva logo outside the company's head office in the city of London March 5, 2009. British life insurer Aviva on Thursday said it was maintaining its dividend, soothing concerns the payout could be cut to conserve capital, and reported annual profits that broadly met forecasts. REUTERS/Stephen Hird (BRITAIN)©Reuters
The returns insurers can generate doing deals with corporate pension schemes are set to come under pressure, the head of Aviva has warned, undermining hopes the industry can offset a collapse in individual annuity sales with such transactions.
Mark Wilson, chief executive of the UK’s second-largest insurer by market capitalisation, has told investors it is “inevitable” profit margins on “bulk” annuities will decline because of mounting competition.
The FTSE 100 chief’s comments stand in contrast to the forecasts of some of his rivals and analysts, who believe corporate pensions insurance has become the industry’s most promising line of business following George Osborne’s Budget reforms.
The Chancellor has scrapped the effective requirement for defined contribution scheme members to buy an individual annuity.
Several companies have said they will deploy capital otherwise set aside for individual annuities to the bulk market, serving corporate defined benefit schemes, as a result.
Executives at other insurers including Legal & General have talked up the prospect of the big pension de-risking deals helping to compensate for an expected decline in the individual annuity market.
“I know some people in the market are saying that the margins aren’t going to decrease on bulks,” Mr Wilson said. “I disagree.”
Under “bulk” annuity deals, pension schemes transfer the risks that their members will live longer – or their investment returns will be weaker – than expected to insurers, in return for a fee.
The arrangements can be complex and difficult to price although consultants estimate they can produce returns on equity for the insurers involved of anything between 10 and 20 per cent.
Aviva had previously been among the UK’s largest writers of bulk annuities, striking a series of deals including a £350m transaction with Friends Provident.
However, the insurer scaled back from the market about two years ago as it underwent a restructuring following the departure of Andrew Moss, former chief executive.
The UK bulk annuity market is now dominated by two specialist companies – Pensions Insurance Corporation and Rothesay Life – and Aviva’s FTSE 100 rivals L&G and Prudential.
Aviva has continued to do deals with smaller pension schemes. In the past year it has done about 60, with a total liability value of £400m. Mr Wilson said Aviva’s appetite for “midsize” deals had increased because of the Budget.
“We’ll do it, but we’re very cognisant of the margins,” he added. “I think the margins will decrease, I think that’s inevitable.”
Clive Wellsteed, partner at pensions specialists LCP, said demand for the deals was also on the rise as pension schemes want to offload the liabilities. He added the additional capital insurers were planning to allocate to bulk deals would prevent prices from rising.
“Demand is increasing, but so is supply,” he said. “There’s more capital available to support larger business volumes.”