Bulk annuity deal purchases by Aviva PLC (LSE:AV.) and Just Group PLC (LSE:JUST) could hit £60 billion by 2025 and 2026 according to Canadian bank RBC after talking with leading market participants, up from the record levels of just below £50 billion last year.
On the downside, RBC says the market is getting more competitive affecting margins while there is uncertainty over new regulatory requirements designed to test buyers' financial strength to protect pensioners.
Industry expectations are for 2024 industry bulk annuity [BPA] volumes to be between £45-49 billion, with this heavily skewed towards the second half. The first half 2024 saw £15 billion in volume, but a record number of transactions.
For each of 2025 and 2026, BPA volumes are forecast to be in the vicinity of £60 billion, surpassing the previous high set in 2023 with growth driven by the small segment of the market where there remain 4,000 schemes
Given the well-funded status of many pension schemes and trustees' fiduciary duty to members (rather than maximising the surplus), RBC adds that secondary decision factors are becoming increasingly important, after price.
With the 'financial resilience' of an insurer as a key second-tier factor, the publication, for the first time, of the PRA's individual life insurer 'core scenario' stress tests in 2025 may provide defined benefit trustees with a more objective measure of balance sheet strength.
RBC has an ‘outperform’ rating on Aviva with a 560p target while Just Group is also rated ‘outperform’ with a 175p target.