Pension Insurance Deals to Be More Pricey

Pensions consultancy Lane Clark & Peacock predicts pension fund 'buyout' deals, where insurance companies takeover schemes' risk, are set to be about twice as popular this year as in 2009, but insurers may run out of capital.

(May 12, 2010) — According to a new report from consulting actuary firm Lane Clark and Peacock (LCP), the cost to companies of transferring their pension scheme risk of people living longer to an insurer is set to rise as surging demand, driven by improvements in scheme funding levels, starts to exceed supply.

“Recovering funding levels have improved affordability since 2009 and, as recent experience shows, funding positions can change materially over days,” said Clive Wellsteed, partner and head of LCP’s buyout practice, in a statement. “A sustained upward swing will mean insurers struggle to satisfy demand.”

LCP’s third annual report reveals £15 billion ($22 billion) of new de-risking business will be written during 2010. This is more than double the £7.5 billion in 2010. Yet, the report warmed insurer capacity is limited — insurers can write no more than £10 billion of buyout or buy-in business each year before prices start to rise, LCP estimated in the report.

With retirees living longer, insurance companies have been increasingly looking for ways to transfer pension liability. Longevity swaps, in which pension schemes are protected against the risk of paying for longer-living pensioners in exchange for an agreed stream of payments, has been a popular solution.

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“There are six reinsurers actively reinsuring longevity risk at the current time with an overall appetite of about 20 billion pounds,” stated the research. “Reinsurance appetite and pricing are therefore key to the development of the longevity hedging market.”

Separately, Hymans Robertson said last week that it expected pension scheme risk transfer deals to grow to over £15 billion during 2010. The consulting firm’s February report showed that 2009 saw about £7.8 billion of pension scheme risk transfer deals, with more expected during 2010. The research indicated 2009’s third quarter was the “highest ever” quarter for those transfers with £3.9 billion, due to longevity swap deals completed by RSA Insurance, Babcock International, and the Merchant Navy Officers Pension Fund’s £500 million buy-in.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

(May 12, 2010) — Cornell University’s departing endowment chief James Walsh, 43, plans to start a $150 million hedge fund in London, targeted to institutional investors.

The departure reflects heightened turnover at endowments across the country following record losses at university funds last year. In February, along with Walsh’s announced departure, University of Florida’s CIO Michael Smith said he would leave the university to join Global Endowment Management as a partner. Dartmouth College in Hanover, New Hampshire, Brandeis University in Waltham, Massachusetts, and New York University in Manhattan didn’t immediately fill their CIO positions as they faced major declines in endowment returns and an uncertain economic climate. In October, Wesleyan University in Middletown, Connecticut, fired CIO Thomas Kannam.

“Having been an institutional investor for a number of years, we thought about what we would want in terms of terms,” Walsh said, according to Bloomberg. “We’re trying to align ourselves with investors.”

Walsh’s fund will invest in stocks, bonds, and other global easy-to-sell assets, he said in an interview with the news service. The fund, named Cayuga Capital Partners for Cayuga Lake near Walsh’s Ithaca, New York, house, will start trading in July.

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Since joining Cornell in 2006, Walsh increased the size of the investment office to 25 people from 17. In February, Walsh announced he would be leaving his post with the university to return to England at the end of the current academic year.

The university lost 26% in fiscal 2009 and stood at $3.97 billion as of June 30 of that year. Harvard University and Yale University, the two wealthiest colleges in the country, battled similar declines in the wake of the 2008 financial crisis. As of February 17, Cornell’s endowment was up 10%.

Prior to joining Cornell, Walsh spent 11 years at Hermes Investment Management in London, where he became head of Strategy and Alternatives, after being the firm’s chief economist.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742