The short supply of illiquid assets in the UK could lead to a capacity crux in the bulk annuity market over the longer term, Legal and General has warned.

Demand for direct investments into infrastructure and real assets has risen hugely over the past couple of years, as pension schemes compete for the illiquid assets which insurers were already investing in.

According to Legal and General, supply capacity in the market is primarily affected by capital, longevity, human resource and assets, but it is the latter that is expected to have the most significant long-term impact.

Legal and General managing director for UK pension risk transfer, Chris DeMarco, said: “What began to happen last year though is the demand for those [illiquid] assets caught up with supply, and it wasn’t just us and our competitors, other insurers, it was pension schemes themselves who said, ‘instead of doing a buy-in, we’ll have some of those assets’.

“The problem is those assets probably grow with the overall economy, we can go further afield, but our inclination is to invest domestically … but those assets are fewer and farther between. So that really is responsible for the movement down in prices.”

For this reason, buy-in pricing has fallen slightly since they bottomed out at the start of 2018, however insurance still remains cheaper than holding gilts.

DeMarco added: “The big one is assets. Whilst it looks pretty good for the short term, over the long term it is looking pretty constrained if demand is to rise by a large amount.

“If demand rose and the prices harden dramatically, demand will fall away, but it is really down to the supply of assets and whether we can find assets to support the price.”

The increase in demand in the bulk annuity market has been driven by maturing schemes closed to new entrants, the improved funding level of schemes and longevity slowdown.

Total bulk annuity volumes reached over £20bn in 2018, with a further estimated £15bn in back books.

According to Willis Towers Watson, the market is expected to stay at "historically high levels" in 2019.

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