End of Year Surge for Risk Transfers

(December 13, 2012) — A flurry of large pension fund risk transfers on either side of the Atlantic is set to improve numbers for the sector after a cool start to 2012.

Today, the UK’s Merchant Navy Officers Pension Fund announced it had secured around £680 million of members’ pension benefits in the fund’s Old Section by purchasing a bulk annuity insurance policy with Goldman Sachs’ Rothesay Life. Around half of the Old Section’s liabilities were secured through policies with specialist insurer Lucida in 2009 and 2010. Lucida was closed to new business last month.

The deal is the largest to be transacted in the UK in 2012, but it is still smaller than some in previous years that were worth in excess of £1 billion. After a poor start to the year, the market has seen a reasonable resurgence. In the third quarter, some £900 million was transacted and last week sugar refiner Tate & Lyle announced a buyin deal with Legal & General, worth £350 million – or around 30% of its members.

By the end of the third quarter, some £2.5 billion in deals had been transacted in the UK. But even adding the latest announcements to this total, the level is likely to fall short of last year’s volume that exceeded £6 billion. In 2009, there was more than £7.8 billion transacted.

Martyn Phillips, head of buyout consulting at JLT Pension Capital Strategies, said the firm expected a healthy number of transactions to be completed during the remainder of 2012. He said insurers were offering flexible contract structures and payment terms to small and medium companies.

Phillips said: “Whilst low yields have led to higher absolute prices compared to 12 months ago, schemes with significant gilt holdings will have seen significant growth in assets, so that the affordability of the buyout route may actually have increased over the period.”

He added that the effects of implementing the Solvency II framework across Europe could make the costs of transferring risks to a third party seem relatively affordable for pension funds.

In the US, deals have started to flow in 2012 after trailing the UK market for some years. Last week, Verizon successfully agreed a deal with Prudential to transfer $7.5 billion of its pension liability, despite an eleventh hour challenge from two of the fund’s members. This followed the megadeal earlier in the year which saw the insurance company take on $26 billion from the General Motors pension fund.

A report by consultants Aon Hewitt said: “The size of pension settlement actions announced in 2012 has redefined the US settlement market. In the US, the amount of pension liabilities annuitized in recent years has not exceeded $1 billion per year, and no single transaction has exceeded $1 billion since the 1980s.”

In the UK, longevity swaps have seen large volumes but few deals as the capital markets through which to trade the risk have continually failed to ignite. Last week LV= announced a deal to insure £800 million of its pension fund with Swiss Re. This was only the second deal this year taking the total amount to £2.2 billion.

For an in-depth look at the General Motors deal and interviews with its architects from aiCIO‘s September edition, click here.