De-Risking Activity Picks Up After Slow Q1

A stable government and new entrants into the UK de-risking market indicate that activity is likely to increase later in the year, according to consultancy LCP.

“The result of a Conservative majority should provide a more stable backdrop for transactions over the rest of 2015.” —Charlie Finch, LCPThe first quarter of 2015 was significantly quieter than the corresponding period in 2014, LCP said, with just £804 million ($1.3 billion) in new buy-out and buy-in business completed.

“The result of a Conservative majority should provide a more stable backdrop for transactions over the rest of 2015,” said Charlie Finch, partner at LCP. “Further, movements in bond and swap markets since the general election have made pensioner buy-in pricing more attractive for many schemes.”

He added that the entrance of Scottish Widows as a new provider later this year would “provide welcome additional insurer capacity”. The Lloyds Bank subsidiary is building a team with a view to becoming active in the second half of 2015.

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“In combination with Partnership and Just Retirement, who are now writing more significant volumes of business at the smaller end of the market, this ensures continued competition across pension schemes of all sizes,” Finch said.

Legal & General continued its recent dominance in terms of new business volumes in the first three months of the year, writing £644 million—80% of the Q1 total. In 2014 L&G was responsible for almost £6 billion of the £13.2 billion in total new business.

LCP Q1 de-risking report Source: LCP

The second quarter has started with more activity, including Rothesay Life’s £675 million buy-in of Lehman Brothers’ UK pension, which is set to become a full buy-out later in the year.

Yesterday, Rothesay announced it was to take on £1.2 billion of individual annuities from Zurich UK Life as the insurance group sought to de-risk its portfolio.

As well as standard buy-ins and buy-outs, two major longevity swaps were completed in the first quarter. Scottish Power offloaded longevity risk valued at £2 billion to Abbey Life, while the Merchant Navy Officers’ Pension Fund established its own insurance subsidiary to take £1.5 billion of longevity risk off the table.

Moody’s Investors Services downgraded Chicago’s credit rating to junk status, citing the city’s ever-growing unfunded pension liabilities.

Following the Illinois Supreme Court’s rejection of a statewide pension overhaul program on May 8, Moody’s dropped Chicago’s debt from Baa2 to Ba1.

“[The downgrade] incorporates expected growth in the city’s highly elevated unfunded pension liabilities,” the credit rating agency said. “We believe that the city’s options for curbing growth in its own unfunded pension liabilities have narrowed considerably.”

The ratings change could prompt up to $2.2 billion in accelerated fees and payments, Moody’s added.

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“We believe that the city’s options for curbing growth in its own unfunded pension liabilities have narrowed considerably.” —Moody’sThe agency’s report said it “expects the costs of servicing Chicago’s unfunded liabilities to grow, placing significant strain on the city’s financial operations,” regardless of the current statutes governing the city’s pension plans.

To trigger a ratings hike, Moody’s suggested Chicago or the State of Illinois put a stop to the growth of pension liabilities or see enough revenue increase to accommodate increased pension costs into annual operating budgets.

Chicago’s four pensions have more than $20 billion in unfunded liabilities, and the city has to pay an additional $550 million to police and fire retirement funds next year.

Mayor Rahm Emanuel said the downgrade is “not only premature, but it is irresponsible to play politics with Chicago’s financial future by pushing the city to increase taxes on residents without reform.”

Moody’s has cut Chicago’s ratings seven levels since July 2013, leaving Detroit as the only US city with a lower credit standing.

Other ratings agencies have maintained a more positive outlook on Chicago. Standard & Poor’s ranks the city at A+ and Fitch Ratings at A-.