Strike Now for Buy-Ins

(April 23, 2012)  —  Investors should strike now to swap their low-yielding sovereign debt for a buy-in solution to hedge out liabilities, according to actuaries and consultants, Aon Hewitt.

Some £200 billion could be exchanged for a buy-in or liability insurance solution by pension funds in the United Kingdom, the company said today.

The switch could secure a better match for pensioner liabilities and reduce risk while insuring against the rising life expectancy of 40% of the schemes’ pensioner liabilities, Aon Hewitt said.

Paul McGlone, Principal and Actuary in the company’s Risk Settlement Group, said: “Aon Hewitt’s Bulk Annuity Market Monitor shows that it is currently a good time for pension schemes holding gilts to get an even better match with their liabilities by undertaking a pensioner buy-in. In doing so, trustees can close out some of their longevity, investment, inflation and interest-rate risk by securing an income stream from an insurer which matches outgoing pension payments.”

McGlone said although buy-ins were not right for all pension funds – particularly those not already holding gilts – for the majority they could be an important step forward in the process of de-risking.

This year has seen two rare types of buy-ins – the first carried out by a fund that was continuing to accrue further member benefits, followed last week by the first carried out by an active public sector institution.

The volume of this kind of transaction has grown over the past five years, although Aon Hewitt has found reluctance from small and medium sized funds to carry out the approach.

Yields on 10 year gilts issued by the UK are around 2.18%, which is lower than the rate of inflation (Consumer Price Index) that is running at 3.5%. Further afield, the 10 year US treasury is yielding around 1.96% against inflation running at 2.7%.