Toby has an interesting viewpoint here
Toby’s article is hard hitting, and microscopic.
Nangle’s examination of the market suggests that there is an opportunity for insurers to take bad risks and avoid scrutiny by “regulation shopping”. There is what Jamie Dimon calls the cockroach problem (where one cockroach like Firstbrand appears, other cockroaches are around) but right now Nangle gives the insurance industry the right to drive down premiums by using private credit (rather than gilts and highly rated public bonds).
Market prices suggest that there is little prospect of an economic downturn sufficient to impede debtors’ timely payment of principal and capital any time in the foreseeable future. If correct, insurers will continue to profit from their greater capital efficiency. So will ordinary people.
Increased competition has pushed insurers to offer better terms for those seeking fixed or variable rate annuities for retirement income.
So tilting the scales away from resilience and towards profitability could prove to have been exactly the right thing to do for insurers. But we’ll have to see how they fare in the next credit downturn to find out.
There is of course a problem with winning business using low prices, it is the risk that that things go wrong. Here’s Andy Smith..
What Andy is saying is that what is being offered right now is a good thing. It may be priced to the advantage of the employer disposing of a nasty liability but are insurers offering the security to members that they are expecting. Does the FSCS have the capacity to meet the bill if one of these Pension Annuity Insurers went bust leaving the pensioners short?
And here is a question (or series of) from an anonymous correspondent
A couple of questions on the FSCS.
A. Does it cover buy in contracts? As I understand it, the members are still being paid by the scheme, legally anyway.B. I assume that the PRA are on top of these insurers so that is one fails there should still be substantial funding there. But who knows? So if one fails and if the FSCS is liable to compensate the scheme(s), who does pay? Al life insurers!? Only those doing BPA business? Or more widely?
We all know that bulk annuity pricing looks very appealing right now when viewed in gilt+ terms.
But what if you look through a different lens?
I had a bit of morning fun calculating a few alternative pricing metrics for a typical 50% pensioner / 50% non-pensioner scheme. In particular:
1️⃣ The implied margin relative to swap yields
2️⃣ The implied margin relative to credit yields
3️⃣ The total implied yield within pricing
What did I find?
➖ Swaps: If you consider swap yields a better representation of risk-free rates than gilts, then margins are now well beyond anything we’ve seen before (>1% pa above risk-free rates).
➖ Credit: The implied margin relative to an all-stocks credit index remains negative, but these margins are at record highs.
➖ Total yield: Unsurprisingly, the total implied yield on buy-ins has surged – from around 1% four years ago to over 5% today.
So whilst pricing looks attractive in gilt+ terms it looks even more attractive under these metrics. What does this mean for pension schemes?
➖ If you’ve been hedging using swaps or a large allocation to corporate bonds, it could be worth considering a switch to gilts to ‘lock-in’ some of the improvement seen relative to gilt-based metrics.
➖ For sponsors with deficits but cash ready to deploy, this could be a great time to act. Topping up now and transacting with an insurer could achieve a yield of c.5.5% pa, and at the same time take longevity risk and ongoing expenses off the table.
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