(August 20, 2013) — The pension fund risk transfer market is set for record year, in the UK at least, but some experts are concerned that capacity constraints could call an early halt for the industry.
By the end of July, publically announced buy-outs and buy-ins had exceeded £3 billion, including a record £1.5 billion buy-out by EMI, according to analysis from consultants and actuaries LCP.
Emma Watkins, partner at LCP said the figures put 2013 “on track to be the biggest year since the banking crisis in 2008” for the risk transfer market.
Despite economic conditions improving in all markets where risk transfer and bulk annuities are the most prominent, only in the UK has business taken off this year. The US, which saw the largest deals last year—GM and Verizon—has, so far, remained a closed shop.
Watkins said significant rises in gilt yields and improvements in equity markets, combined with a pick-up in the wider economy, boosted the sector, adding: “Higher funding levels have improved affordability and appetite from both pension plans and insurers has increased.”
Analysis from Towers Watson also showed that pricing was becoming more reasonable for pension funds, with prices coming down to those seen a year ago from the inflated costs seen in the last 12 months.
In the short-term, Watkins said market capacity would easily expand to soak up demand, but in the longer term, there may be problems as insurers would become more selective in choosing deals.
Her concerns were echoed by Alastair Meeks partner at law firm Pinsent Masons.
“We can expect to reach a point fairly soon when there will be far more pension schemes wanting to buy out than there is capacity in the market to absorb them,” he said. “Some, perhaps most, of those schemes are going to find their plans thwarted. The successful schemes will be the schemes that are ready to move fast.”
Meeks said Basel III reforms were having an impact on banks’ interest in the insurers that take on pension liabilities and that stance was a symptom of a drop in supply by insurers, just when demand was about to take off.
As a potential illustration, Goldman Sachs announced its intention to sell its venture into the sector—Rothesay Life—which had become one of the more successful companies offering derisking.
“The goal of achieving buy-outs seems to be increasingly illusory, and it may be that alternative options need to be contemplated. Self-sufficiency is a real alternative for many businesses and need not be a deterrent to external investors,” Meeks said.
However, David Collinson, co-head of business origination at Pension Insurance Corporation (PIC), refuted claims of capacity constraints.
“We have plenty of capacity,” he told aiCIO, “and if the market expands, we will raise more capital from investors as we have done in the past.”
PIC has led the field in the UK this year with £2.28 billion of buy-ins and buy-outs announced, giving the company a market share of over 70%.
Collinson said insurer and asset manager Legal and General had announced it was prioritising the market and had restructured its bulk annuity business to report direct to the CEO.
With around £1.3 trillion in outstanding pension liabilities, Collinson said the UK still had plenty of appetite to de-risk through the market, and improved economic conditions were bringing more of them to the table.
He admitted that banks may not be as keen as before the financial crash to get involved, due to capital ratios and other guidelines imposed by Basel III regulations, but maintained that insurers were still keen on the market.
He said there could be a further drop in price if market conditions improved and more customers came to market, which would in turn form a virtuous circle and bring insurance-focused investors—and their capital.
There has been practically no activity from the US so far this year, even though in June, Glenn O’Brien, managing director of Prudential’s pension risk transfer business, told aiCIO the US was starting to see an increase in sponsors willing to transact.
“I was less optimistic [about the buyout market] at the beginning of the year, as companies were focusing on their year-end disclosures. But the macro-economic situation has improved and we’re starting to see a pick-up in interest in companies willing to deploy cash,” he said.
Related content: Bulk Annuity Transfer Prices Reach Record Lows, Says Towers Watson & Pension De-Risking: Beyond the Buyout Binary