Insurers eye bulk annuity boost after budget blow

* New players set to enter bulk annuity market

* Biggest deal to date was 3 billion pound buy-in in March

* Standard Life's annuity sales fall 50 percent since budget

By Jemima Kelly

LONDON, May 6 (Reuters) - Insurers hit by a UK governmentshake-up of pension rules are set to make up some of their lostbusiness by ramping up the number of retirement deals they sellto companies rather than individuals.

The industry was dealt a surprise blow in the March budgetafter retirees with pensions reliant on financial marketreturns, so-called defined contribution schemes, were told thatfrom April 2015 they would no longer have to buy an annuity, orincome for life, at retirement.

For insurers with a big annuity business, such as Resolution and Legal & General, this raised fears of aslide in profits. Resolution's shares have plunged 15 percentsince the budget and those of L&G, which last year generated 29percent of cash flow from its retirement division, 8 percent.

The full impact will not be known until the changes comeinto force, though Standard Life said last Wednesday thatsales of annuities, which accounted for 6 percent of the group'soperating profit in 2013, had already fallen by 50 percent inthe weeks following the budget.

But the blow could be softened by demand from definedbenefit - or final salary - pension schemes, many of which areseeking to hive off their exposure to the risk that schememembers live longer than expected or that interest rates rise,in so-called "bulk-annuity" deals.

The Pension Protection Fund reckons total liabilities in UKfinal salary schemes top 1.2 trillion pounds ($2 trillion),almost the size of the UK economy.

This year has already seen a record-breaking 3 billion pounddeal between L&G and now defunct chemicals firmICI..

"You're going to have to sell quite a lot of individualannuities to make that kind of money," said Martin Membery, headof insurance at law firm Sidley Austin. "So you can see whythese types of deals could be almost a direct replacement forwhat they're otherwise losing."

While companies can write a derivative contract to removetheir exposure to the old-age concern in a so-called longevityswap, insurers will be hoping they opt for the bulk annuitydeals, which are more profitable and give the insurer all theassets upfront to invest.

In such deals, the pension scheme sheds responsibility forpaying its members their retirement income, either through abuy-out, where the insurer takes over everything, or a buy-in,where the scheme remains the administrator.

NEW IMPETUS

The demand for bulk annuities is already strong, with arecord 7.5 billion pounds ($12.7 billion) of deals struck in2013.

While the first bulk annuity deals were agreed in the 1980s,tougher accounting standards and EU funding requirements, aswell an increasing number of final salary schemes closing, havecombined to drive up demand from pension schemes.

Consultant Hymans Robertson expects at least 20 billionpounds of bulk annuities to be written in 2014 and more thanthat next year. 18 FTSE 100 firms have taken part insuch pension scheme risk transfer deals, and the consultancyexpects that number to increase to 50 by 2017.

If that's right, Membery said, there will be a "massiveamount of activity" over the next few years. He also pointedout, though, that the market is finite - with final salaryschemes being phased out, bulk annuity deals can only live aslong as their members.

So far the bulk annuity market has been dominated by ahandful of players - last year just eight insurers wrote 186deals - but that could be set to change.

"Besides those insurers which already operate... we alsoexpect there to be a number of new entrants to the bulk annuitymarket," said Sadie Hayes, transaction specialist at consultantTowers Watson.

That extra competition will bring its own pressures, though.

"In my mind it's absolutely clear that, in the short andmedium term, the impact of the budget will be to reduce bulkannuity pricing," said James Mullins, a partner at HymansRobertson, citing an insurer currently finalising a "good-sized"deal that lowered its offer price by 3 percent after the budget.

But L&G, which wrote 1.3 billion pounds of bulk annuitydeals in 2013, said high demand from pension schemes for buy-insand buy-outs would keep pricing high.

"I don't think it (the budget) is causing any marginpressure," said Tom Ground, L&G's head of bulk annuities.

"We're expecting to see certainly good margins, if notimproving margins, on the bulk side given the number ofopportunities coming to the market."($1 = 0.5919 British Pounds) (Editing by Simon Jessop and Elaine Hardcastle)