Mercer has identified a clear global trend in sponsors of defined benefit pension plans accelerating their intentions to manage their pension risk and ultimately transfer it to external parties. Many countries have significant pension obligations and plan sponsors have suffered the burden of persistently low interest rates, volatile equity markets and rising life expectancies – exacerbated by the protracted economic down-turn. This has increased pension deficits significantly across many markets and presented domestic and multi-national CFOs with increasingly unwelcome pensions distractions.
Mercer’s UK figures* for the last five years show a significant increase in the size of bulk annuity and longevity swap deals. Close to 100 bulk annuity and longevity swaps deals over £50m in size have been made in the UK since 2007, the combined value of these deals having now reached over £33bn. The last few years have also seen an increasing number of FTSE companies completing them. In 2011, c150 deals with a total worth of c£10.2bn were made, including major deals by FTSE100 companies ITV and Rolls Royce.
The news earlier this month of General Motors Co’s intended discharge of around $26bn of defined benefit pension liabilities to individual Plan members and The Prudential Insurance Company of America is the latest in a series of high-profile companies proactively managing their pension obligations in the US and Europe. The trend is no surprise to Mercer’s Global Head of DB Risk and Senior Partner, Frank Oldham: “The market for transferring pension risk away from plan sponsors has developed significantly in the UK in recent years with the number, size and sophistication of these deals all moving on in leaps and bounds. Other European countries, particularly the Netherlands and Ireland, are also starting to see more activity and interest in this area and so it was therefore just a matter of time before these developments transferred to a latent US market.”
David Ellis, Mercer’s Head of Insurance-based De-risking in the UK, commented on what is currently a key difference between the UK and US markets for transferring pension obligations: “UK plans have trustees that are independently charged with securing plan benefits and therefore transferring pension obligations to a third-party such as an insurer can be a desirable option. Many US plan sponsors have been hampered by their fear that the equity and debt markets might react adversely to this type of action. The initial market reaction to the General Motors Co announcement demonstrates that this has not been the case and so opens the door for further action.”
Gordon Fletcher, Principal and one of Mercer’s US-based specialists in this area, described some of the transatlantic developments: “We have seen Prudential announce a longevity reinsurance deal with a UK insurer and we know that other US insurers are also interested in UK business. This is significant since it shows that at least some US insurers have such a strong appetite for pension risk that they are willing to travel over 3,000 miles to get it. Across the globe, we are seeing developments, with AEGON in the Netherlands transacting a longevity swap and the announcement that a Canadian insurer is now open for longevity business.”
With pension markets across the world developing at different rates, Mercer brings together deep market knowledge derived from practical experience across the globe to ensure its clients can stay ahead in this rapidly developing area.
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