Hymans Robertson Predicts Record UK Pension Derisking in Q2

(May 23, 2011) — Corporate pension funds in the UK plan to offload about $32 billion (£20 billion) in defined benefit liabilities over the next 18 months, pension consultancy Hymans Robertson has shown.

According to the consultant firm, pensions will transfer their risk to banks and insurers, leading to a record number of deals to complete buyouts, buyins, or longevity swaps. James Mullins at Hymans stated in a release that by the end of 2012, one in four FTSE 100 companies would have completed either a buyout or a buyin.

“Our analysis illustrates that it won’t be long before £50 billion of pension scheme risk has been transferred to insurance companies and banks,” Mullins said. “2010 was the third successive year during which £8 billion of pension scheme risks were transferred via buy-ins, buy-outs and longevity swap deals. 2011 is likely to see a substantial increase above these levels.”

He added: “Banks and insurers continue to offer new flexibility to make risk transfers accessible and more affordable to all pension schemes. It is crucial that companies and trustees are aware of this flexibility and innovation to ensure that they do not miss excellent opportunities to reduce risk. In addition, schemes are increasingly keen to manage away as much risk as they can.”

Hymans Robertson’s research described the environment of pensions offloading liabilities as a snowball effect. “The more schemes that tackle risk, the more pressure there is on others to follow suit,” Mullins stated. “The raft of final salary closures over the last two years, and the impending restrictions on tax relief for high earners’ pension contributions, are raising serious questions for companies over the merits of continuing to run significant risk within their DB pension schemes.”

A March report by Hymans Robertson provided further evidence that UK pension buyouts are becoming more and more prevalent.

“An increase in mergers and acquisitions activity is driving this,” Mullins told the Financial Times. “Any potential purchaser will welcome a company that has already done a deal to transfer risk to an insurer. There is less to worry about,” he said, noting that concerns over longevity risk coupled with a greater number of closures and part-closures of defined benefit pension schemes have fueled the trend.

A recent example illustrating the growing popularity of risk transfer deals is the Pension Insurance Corporation’s (PIC) decision in February to reinsure $799 million of longevity risk to better manage risk and more effectively compete for new business.

Similarly, in January, Swiss Re, the giant European-based reinsurer, decided to transfer $50 million in longevity risk. The investors in the Swiss Re deal were largely pension funds and other insurers.