Key findings from Hymans Robertson’s first quarterly buy-in monitoring service:
- Tracking the price of various forms of pension scheme risk transfer options is key to helping trustees, pension managers and finance directors understand when is the right time to do a deal and which type of deal best meets their objectives.
- The increase in the value of Government gilts has materially outperformed increases in buy-in premiums over 2011 and schemes planning a pensioner buy-in could see significantly more value in this type of transaction than would have been the case at the start of last year.
- Widening credit spreads on corporate bonds have made pensioner buy-in more attractive to holding gilts, creating an opportunity for schemes to exchange gilt holdings for a buy-in, doing so on terms that will be broadly cost neutral and hedging longevity risk in the process.
- Some of the drivers behind buy-in prices falling relative to gilts are magnified for older liabilities, and for most schemes a buy-in is likely to be the most cost effective hedge for older pension liabilities.
Hymans Robertson has today unveiled a new quarterly buy-in monitoring service for pension schemes, designed to track and analyse pension pricing conditions in the buy-in market. This service provides a useful platform for trustees, pension managers and finance directors that are examining de-risking transactions, allowing them to make informed decisions about when conditions are favourable for transaction execution.
James Mullins, Partner & Head of Buy-out Solutions at Hymans Robertson, comments:
“Tracking the price of various forms of pension scheme risk transfer options is key to helping trustees, pension managers and finance directors understand when is and isn’t the right time to do a deal, and which type of deal best meets their objectives.
“A buy-in represents an excellent hedge to the risks faced by a pension scheme and is sometimes overlooked as an alternative to gilts or a Liability Driven Investment strategy. Different insurers price buy-in differently and relative pricing fluctuates over time. Our new Buy-in Monitoring Service offers trustees, pension managers and finance directors the information they need to make informed decisions on this and gives them the confidence that they are paying a competitive price for the deal.
“Schemes considering using gilts to fund a pensioner buy-in exercise could see significantly more value in this transaction than would have been the case at the start of 2011. Buy-ins are particularly well priced at present for mature schemes with lots of older pensioner members.
“Indeed, we are currently working with many clients to help them understand the specifics of how their own pension scheme would look before and after a buy-in transaction, in terms of the relative risk and balance sheet positions.
“Sponsors will be all too aware that poor performance from equities over 2011 will have moved many schemes further away from any plans to buy out the scheme. Equity rallies over Q4 2011 were only able to keep track of the increase in buy-out premiums caused by falling yields. However, current dynamics in buy-in prices represent an interesting opportunity to increase efficiency in hedging strategies and schemes should investigate them.
“Most pension schemes hold Government gilts (or other matching assets) to broadly match some of the pension payments that they expect to pay out. It is these matching assets that would typically be used to meet the cost of buy-in.
“The good news for pension schemes is that, whilst the cost of a buy-in will have increased in absolute terms as a result of the fall in long-term interest rates, the cost of a buy-in relative to the value of these matching assets is likely to have fallen quite significantly.
“Indeed, current market conditions and pricing means that the cost of a buy-in that insures older pensioner payments will often be cheaper than the value of Government gilts or a Liability Driven Investment strategy to broadly match the same pension payments.
“This presents a great potential opportunity – a pension scheme could:
• sell £100m of gilts that provide only a reasonable match for pensioner payments (and provide no protection against longevity and other demographic risks); and
• buy a buy-in policy for £98m that provides an excellent match for the same pensioner payments.
So you could reduce risk and improve the pension scheme’s balance sheet position at the same time. A great result for trustees, sponsoring employers and, most importantly, pension scheme members.”
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