If You Don’t Think It Is a Good Time to Buy Annuities, Think Again!
How is annuity pricing now? Is this a good time to buy annuities? Some version of this question is the most common question we are asked at BCG. And the answer at the moment (July 2020) is that this is a great time to be buying annuities. Here’s why:
In the wake of the chaos created by COVID-19, we have seen many plan sponsors who are not forging ahead with annuity placements or plan terminations as previously planned. This should result in a reduction in the number of placements, likely to occur Q2 through Q4 of 2020, though Q2 numbers may have be buoyed by placements that were already in process when COVID-19 first hit. Fewer plans going to the market for placements means that the insurers will have fewer opportunities to win placements. Those placements that do move forward should see increased aggressiveness in pricing, as insurers attempt to maintain the number of placements they had previously anticipated despite fewer opportunities.
A secondary effect of the COVID-19 crisis is that annuity placements act as a hedge for insurers. The annuity placement insurers are also (by and large) well known life insurers. With 100,000+ unanticipated deaths, losses will be experienced on life insurance policies. Annuities can be used to counteract life insurance losses – as annuities result in gains when deaths occur sooner than anticipated. So as U.S. mortality appears as if it will see an (hopefully temporary) increase due to COVID-19 deaths, insurers that deal in life insurance will want to offset their mortality risk by bulking up the annuities under their umbrella.
There are currently 16 insurance companies participating in the annuity purchase market. This is twice as many as there were a decade ago. The insurers are well aware that the carrier selected will very often be the one with the lowest price, and having more competitors drives prices down.
Insurers will invest heavily in fixed income to back the annuities for which they’re responsible. There’s a limited amount of fixed income available in the market so rather than accept cash in return for taking on these annuities, insurers are more likely to accept an “Asset-in Kind” transfers. That is, they’ll simply take the (fixed income) investments that are currently held in the plan to help to reduce transaction costs. This sort of transaction has typically been reserved for larger placements (often well over $100M), but this threshold has been decreasing rapidly as fixed income investments become harder and more costly to acquire.
This may be a very temporary opportunity, and it may not apply for all insurers. As previously mentioned, insurers tend to invest in fixed income to support annuities. The quality of these fixed income investments varies. But during March, we saw a large and unprecedented gap emerge between the highest yielding (“Above Median”) AA Corporate bonds and more standard corporate bonds (e.g. as measured by the FTSE Pension Liability Index and FTSE Above Median AA Index). Those insurers that tend to invest more heavily in the Above Median bonds would price the annuities much more favorably than under ordinary circumstances. The difference in the FTSE curves (Above Median vs. Standard) is typically 10-15 basis points and had not been above 20 basis points in the past 8 years, until it jumped to a 40 basis point (“bps”) difference in March. This dropped back down to 32 bps by the end of April. This appears to be reverted to the normal spread – but there still may be some savings to be had before things get back to “normal.”
THE BCG IMPACT
It may appear self-serving to be suggesting that it is a great time to be buying annuities. In reality, it’s been a while since we’ve observed a “bad” time to buy annuities. Aside from observing slight increases in pricing that can occur very late in the year (November/December), annuity pricing tends to be very consistent. But each of the items mentioned above are factors that help to reduce prices that have occurred in the recent weeks, months, or years.
But the biggest factor may be who is helping to place the annuities. At BCG, our business was built on annuity placements. Our team has significant and varied experience to make the placement a simple and painless process for plan sponsors. And our proven process will obtain the lowest possible price. Give us a call today. We will make sure you are in good shape to transact on your terms, when the time is right for you.