UK Report Says Buyouts, Buyins Are at Peak of Attractiveness as Pensions Derisk

(June 8, 2011) — De-risking using buyouts, buyins, and longevity swaps have never looked more attractive, says UK-based consultant Lane Clark & Peacock (LCP).

In a report published today, the firm notes that as pensions tackle the mounting costs of defined benefit schemes, pension scheme buyouts — in which companies transfer their closed pension plans to insurance firms — and other derisking 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 buyins more affordable and consequently a more popular derisking option.

According to the firm, buyins and buyouts are a natural way to lower risk in funding levels, accounting deficits and cash contributions. “With over 15% of UK pension plans now closed to future accrual, a growing number of pension plans are considering these options,” LCP’s fourth buyout report for finance directors, trustees and the other senior decision makers claims.

Furthermore, the report finds that the pensioner buyins, 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.

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A report last month by Hymans Robertson provided further evidence confirming the embrace of derisking strategies in the UK. With $7.2 billion (£4.5 billion) worth of risk transfer deals completed over last year, the second quarter of 2011 looks to be a record quarter for the number of buyin and buyout deals completed in the UK, according to the consultancy, and pensions will transfer their risk to banks and insurers, leading to a record number of deals to complete buyouts, buyins, or longevity swaps. James Mullins at Hymans stated in a release that by the end of 2012, one in four FTSE 100 companies would have completed either a buyout or a buyin.

“Our analysis illustrates that it won’t be long before £50 billion of pension scheme risk has been transferred to insurance companies and banks,” Mullins said. “2010 was the third successive year during which £8 billion of pension scheme risks were transferred via buy-ins, buy-outs and longevity swap deals. 2011 is likely to see a substantial increase above these levels.”

Jibing with LCP’s and Hymans Robertson’s reports, the Pension Corporation, the buyout specialist founded by City investor Edmund Truell, has completed a deal to buy £60 million worth of pension liabilities from Toray Textiles, one of the biggest manufacturers of woven polyester and nylon in Europe.

Similarly, last month, Prudential Retirement completed its first US buyin with a $75 million pension risk transfer. North Carolina-based Hickory Springs Manufacturing Company selected Prudential’s Portfolio Protected Buy-in to complete the pension risk transfer transaction.

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

The A$5.8 billion MTAA Super fund is being investigated by the Australian Prudential Regulation Authority (APRA) over its response to the global financial crisis.

(June 8, 2011) — The A$5.8 billion MTAA Super is being investigated by the Australian Prudential Regulation Authority (APRA) for removing its currency hedges in the midst of the global financial crisis, the Australian press is reporting.

There has been huge volatility in the Australian dollar vis-à-vis the American dollar, contributing to a reported A$500 million in losses by the MTAA superannuation fund for the removal of its currency hedges during the financial crisis. However, following the claims, MTAA Super defended its practice of currency hedging, noting that it did not suffer $500 million in losses from removing currency hedges. “The fund was hedged during the financial crisis and as a result, when the Australian dollar plummeted, it — like all funds that were similarly hedged — paid for the hedge contracts that matured during that time,” MTAA Super Chief Executive Michael Delaney told The Australian. MTAA Super added that currency risk is a risk faced by all superannuation funds that have offshore investments.

The Australian also reported that regulators must go easy on superannuation funds for making investment losses, as they will risk undermining member confidence in funds. Warren Chant, director of industry consultants Chant West, echoed Delaney’s claims, telling the publication that most funds used some amount of currency hedging to guard against fluctuations in the value of their overseas assets. Consequently, all those funds would have lost money following the financial crisis when the dollar plunged.

In March, aiCIO explored the greater commitment to currency exposures among Australian schemes as a result of the global financial crisis (GFC).

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“Speaking broadly, the GFC has brought to life the idea that funds need to dynamically manage their currency exposures,” said State Street Global Services Head of Sales for Australia Greg O’Sullivan. Other outcomes of the crisis, according to O’Sullivan, include more stress testing, a greater appetite for outsourcing, and carrying more cash. “The forward spreads in September and October 2008 were immense,” added O’Sullivan’s colleague Ian Martin, Head of SSgA S.E Asia and Pacific and Head of Global Markets Australia & New Zealand. “The cost of hedging was so high that funds now focus a lot more on how much cash they have available—above and beyond the 9% a year that flows into the system.”

“With many capital pools increasing in size (and few are doing so faster than the Australian superannuation funds) and thus likely to outstrip home-market capacity (yes, even American investors will invest more externally), more portfolios will be exposed to currency fluctuations,”aiCIO‘s Editor-in-Chief Kip McDaniel reported. “As they are, funds would be well advised to learn from Australia’s recent travails: Hedge your currency exposure, but be prepared for what that hedge will do.”

Click here to see the new GC Australia — a sister publication to aiCIO — that focuses on the Australian superannuation and alternative fund industry, from a securities services perspective.

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