Buyout Gaining Popularity as LDI Endgame

(November 15, 2012) — The number of corporate pension considering liability-driven investment (LDI) as a route towards a full or partial buyout has almost doubled over the past year, a survey has revealed this week.

Over a quarter of global pension funds and sponsoring companies responding to a survey by investment manager and consultant SEI said buyout was the goal for them implementing an LDI strategy. This 26% was up from the 15% citing the same reason last year. When the annual survey began in 2007, just 8% cited buyout as the reason for LDI.

“The goal of ‘progressing the pension towards termination or buyout’ nearly doubled in popularity this years, which may demonstrate that more pension trustees are considering the viability of their schemes as part of an overall LDI approach,” the SEI report said.

Different parts of the world have different approaches, however. The number of respondents from the UK, 80% of whom last year considered buyout as the endgame for LDI, this year fell to 48%. This indicated that respondents from other corners of the world were keener to transfer pension obligations to a third party through a buyout.

“This sharp fall may owe its genesis to the…fall in funding levels that have made pension buyouts prohibitively expensive for many schemes. While transferring liability risk to an insurance company is clearly still a goal, it has been superseded by a focus on managing funding level volatility,” the report said.

In the UK, bulk-annuity and buyout business placed in the first three quarters of 2012 surpassed that written over the same period in 2011 – £2.3 billion compared to £2 billion, according to consultant AonHewitt. “However, Q4 will need to be very strong if 2012 is to match the level achieved in 2011, given the historically high value of cases written in the final three months last year,” the consultant said this week.

This year saw the largest pension risk-transfer to date. In the United States – which has lagged the UK in terms of progress in the buyout field – automotive manufacturer, General Motors, offloaded $26 billion in pension liabilities to insurer Prudential in the summer. The deal, to be finalized after a retiree election period ending in November, was the subject of aiCIO‘s cover story in September, titled “This Changes Everything.” The insurer took on $7.5 billion in liabilities of Verizon Management Pension Plan last month.

The main reason for implementing an LDI strategy remained to control volatility of the funding status of the pension fund, SEI said.

For an in-depth look at the sector, see aiCIO’s annual LDI edition, published later this month.