Buyouts Level Off in Favor of ‘Cheaper’ Buy-Ins
(August 2, 2012) – Pension fund buyouts remained steady in the first quarter of this year, totaling £500 million ($776 million), after high deal volumes throughout 2011, according to London-based JLT Pension Capital Strategies.
Despite grave economic uncertainty, particularly in JLT’s home territory, prices for buyout deals remained stable during the first three months of 2012. “It remains to be seen what effect the persistent sovereign market crisis in Europe will have on the bulk annuity market,” Martyn Phillips, head of buyouts for pension de-risking consultancy JTL, said in a statement. “The market has been buoyant during testing conditions, with a record number of deals being completed in 2011.”
The first ever buyout to have included active members was completed during the quarter, when United Kingdom-based automotive part manufacturer DENSO insured sections of two of its pension schemes worth a total £200 million with Pension Corporation. DENSO now pays an annual premium to its insurer, based on a formula linked to the number of active members and their eligible salaries.
With insurers getting imaginative with de-risking strategies, JLT forecasts a boost in deal volume for the balance of the year. “Deal activity for the rest of the year, in particular pensioner buy-ins, is expected to improve after a period of stability in Q1 2012,” Phillips said. “As insurers continue to offer flexibility in their terms, interest in de-risking solutions will remain high and more schemes of all sizes will approach the market over the remainder of 2012.”
Buy-ins proved particularly attractive in the first quarter to schemes with portfolios heavy on relatively high-yield government bonds. Several funds simply swapped gilt holdings for a pension insurance buy-in, with the interest rate spread compensating for most or all of the premium.
Even for pension funds without the high-yield golden ticket, Phillips advised careful consideration of de-risking strategies. “Market volatility means that it is extremely important for schemes to prepare in advance if they are serious about transacting. Even if current conditions may be seen as prohibitive, advance preparation will enable a scheme to transact swiftly once conditions allow.”