Study Predicts Record Year for Scheme De-Risking

(November 14, 2011) — Risk transfer deals among pension funds in the UK could surpass £9 billion before year end, according to a new analysis by Hymans Robertson.

The consulting firm also found that more than £2 billion of pension fund liabilities was transferred in the third quarter of the year through buy-ins, buyouts — in which companies transfer their closed pension plans to insurance firms — and longevity swaps. Looking ahead, the firm noted that a large number of risk transfer deals are likely to close in the fourth quarter, making 2011 a record year for de-risking among UK pension plans with deals likely topping £9 billion. Meanwhile, Hymans Robertson found that longevity swaps have removed £9 billion of scheme liabilities since they took off in 2009. The £1.1 billion Turner & Newall buy-in with Legal & General, announced at the end of October, was the largest of its kind to date.

“A series of significant pension scheme risk transfer deals expected to close during the fourth quarter of 2011 look set to ensure that 2011 will be a record year for pension scheme buy-ins, buy-outs and longevity swaps; with deals potentially topping £9 billion of UK pension scheme liabilities during 2011 alone,” commented James Mullins, Partner and Head of Buy-out Solutions at Hymans Robertson, in a statement. “Pension schemes are increasingly viewing buy-in deals simply as an investment strategy decision, and one that looks particularly attractive in the current market. Many pension schemes are reviewing their Government gilt holdings, which provide quite a good match for pensioner liabilities, given the option to exchange some of their Government gilts for a buy-in policy, which provides a near perfect match for pensioner liabilities, and at a potentially lower cost. This pricing dynamic is one of the few positives for UK pension schemes following the market turmoil since the summer of 2011.” 

Looking ahead into 2012, Mullins added: “As long as banks and insurers continue to provide a flexible approach to make these risk transfers feasible and affordable to all pension schemes, we will see more deals in the pipeline and indeed more insurance companies looking to enter into this market.”

In June, UK-based consultant Lane Clark & Peacock found that prospects for pension deals have never looked more compelling as schemes strive to de-risk. The firm noted that as pensions tackle the mounting costs of defined benefit schemes, pension scheme buyouts, and other de-risking strategies will become more common. The consultant’s latest pension buyouts report said that the continuing closures of DB schemes coupled with robust gains in assets since 2009 have made buy-ins more affordable and consequently a more popular de-risking option.

Buy-ins and buyouts are a natural way to lower risk in funding levels, accounting deficits and cash contributions, according to LCP. “With over 15% of UK pension plans now closed to future accrual, a growing number of pension plans are considering these options,” the company wrote in its fourth buy-out report for finance directors, trustees and the other senior decision makers.

Furthermore, the report finds that the pensioner buy-ins, buyouts and longevity swaps have reached nearly £30 billion ($49 billion) worth of transactions. By comparison, total business volumes peaked at a total of £8.3 billion last year, which was largely driven by smaller deals as more than 90% of transactions in 2010 were less than £50 million.