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LONDON (Reuters) — Deals involving transferring the risk of British company defined benefit pension schemes to insurers are likely to total £10 billion ($15.35 billion) this year, down from last year's record £13 billion pounds, consultants Aon Hewitt said Monday.
These "bulk annuity" deals are a good source of income for U.K. life insurers, particularly after government pension reform at least halved the sale of individual annuities.
For companies, the deals remove the headache of running the pension schemes. Years of low interest rates mean many schemes are in deficit and these sometimes need to be filled by the company before the life insurer takes on the risk.
Aon Hewitt said in a report there had been £3.6 billion pounds in bulk annuity deals in the second quarter, compared with only £800 million in the first quarter.
"With insurers busy on a substantial number of transactions which could conclude before Christmas, £10 billion is not an unrealistic expectation for year."
But European Solvency II capital rules to be introduced in January are likely to mean insurers have to set aside more money to cover the cost of bulk annuity transactions, and these have been a concern.
"2015 has been a period of flux," Aon Hewitt said, pointing out that on Solvency II, "some details have remained obstinately gray."
Life insurers are moving to reinsure this business outside Europe to soften the impact of the new rules.
Prudential P.L.C. and Legal & General Group P.L.C. were the most active in the bulk annuity market in the year to date, the report said.
Heineken completed a £2.4 billion ($3.7 billion) longevity swap transaction with Friends Life Group Ltd., part of Aviva P.L.C., to protect against the risk of retirees in its pension fund living longer than expected.