Mega Buyouts Land in the UK

The UK’s largest pension risk-transfer to date has its pushed deal volume towards record levels in the first quarter of the year.

(March 26, 2014) — The UK’s largest pension buyout has been transacted by a fund using two insurers to complete the deal.

Chemical company AkzoNobel has insured its ICI Pension Fund members’ benefits—in a scheme acquired when the firm took over rival ICI in 2008—in a deal worth £3.6 billion, all partners announced today.

The fund was one of the first, and certainly the largest, to use two insurers to take on its pension liabilities: Legal & General and Prudential.

“The insurers have sought to reinsure the majority of the longevity risk immediately,” said Ian Aley, senior consultant at Towers Watson, who advised AkzoNobel on the deal. “This two-stage process is routinely used in the longevity swap market, however to date the insurers in the bulk annuity market have generally held the risk for a period of time before reinsuring.”

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So far this year, deals in the UK have made 2014 the third largest on record already, Towers Watson said. This one deal makes up almost half of last year’s record £7.6 billion transacted over the 12 months. It is double the size of the previous largest deal—a £1.5 billion transaction between music group EMI and Pension Insurance Corporation.

The longevity hedging market has also received a boost this year, through a £5 billion transaction by the UK staff pension fund of insurer Aviva, announced earlier this month.

Due to their close working relationship with insurers, Towers Watson revealed there would be more deals of this size in 2014.

“The expected surge in transaction sizes is driven by both supply and demand factors,” said Sadie Hayes, transaction specialist at the firm. “The majority of the longevity risk from these large transactions, whether they are bulk annuities or longevity swaps, will ultimately end up being reinsured. The longevity reinsurance market is currently very competitive, with an ever-increasing number of players and the growing size of transactions that the reinsurers will consider as they become more confident with UK longevity risk. This, combined with a significant improvement in solvency levels among most schemes in the last 12 months, is providing even the largest pension schemes a credible option to materially reduce risk.”

Although on a slightly smaller scale, mega buyouts have also landed in Canada. This month, an unidentified Canadian company purchased $500 million of annuities from an insurer, Towers Watson confirmed, which ranked as the largest pension risk transfer.

The record for the largest deal to date remains with US automotive company GM, which offloaded $26 billion in pension liabilities to Prudential in 2012.

Home > News > Asset Allocation > The Disappointment of Hedge Fund ETFs

Asset Allocation March 26, 2014

The Disappointment of Hedge Fund ETFs

Hedge Fund ETFs continue to disappoint investors, but allocation remains on the increase.

(March 26, 2014) — Investors allocating to ETFs that track hedge fund strategies have reported another disappointing year, data from academics at EDHEC has found.

Less than 35% of users of this class of ETF reported they were satisfied with its performance in 2013. This level of satisfaction had already dropped over 2012 to 40% from a record high—for this asset class—of 65% in 2011.

In comparison, users of equity-bases ETFs have reported a 90% or higher satisfaction level since EDHEC began issuing its ETF Survey in 2006. By the end of 2013, these equity ETF users reported a 98% satisfaction level.

“These investment products enable investors to gain simple access to alternative investment opportunities such as hedge funds, commodities, real estate, or infrastructure,” the EDHEC report explained. “ETFs on alternative asset classes allow investors to diversify portfolios but do not require the infrastructure needed for direct investments and manager selection in alternative asset classes, infrastructure they may be unfamiliar with.”

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The pull of these investment tools are clear, and investors have increased their allocation them rapidly, EDHEC said. In 2006, less than 10% of investors reported using hedge fund ETFs; in 2013, around 41% said they had an allocation to them. This is also due to a proliferation of new products, EDHEC said, adding that what attracted investors to the product may also be the cause of their frustration.

“ETFs in the alternative investment universe must deal with illiquid underlying assets, an obligation at odds with one of the main objectives of ETFs, that is, to provide high liquidity,” the report continued. “As a result, ETFs must usually rely on liquid proxies of the asset class that can only approximate the price movements in these asset classes.”

Hedge fund ETFs can rely on hedge fund factor models that make it possible to replicate the performance of broad hedge fund indices by investing in more standard and thus more liquid assets. To ensure the liquidity of the ETFs, only hedge fund managers who are active in strategies known for their liquidity are selected, EDHEC said.

For real life hedge funds, 2013 was a positive year, but as a group the strategies failed to outperform the S&P 500. Hedge funds recorded their best performance in three years in 2013, largely due to the strong equity market, ending the year with a 9.2% return, data firm eVestment found. In contrast, the S&P 500 rose more than 26%.

Investors reported only sustainable, responsible investment-based ETFs were more disappointing in 2013.

To read the full report, produced in association with Amundi, click here.

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