Quarterly Buy-in Monitoring Service finds the cost of a buy-in fell further in Q2
Key findings from Hymans Robertson’s quarterly Buy-in Monitoring Service:
• Over the past quarter, the cost of hedging pensioner liabilities with a buy-in has fallen further relative to the cost of an equivalent gilts portfolio
• For schemes holding gilts specifically to hedge pensioner liabilities, the terms for exchanging these gilts for a buy-in have improved
• When looking at liabilities for older pensioners in isolation, the favourable price gap also increased over the quarter
• Full buy-out is typically more expensive than using gilts or an LDI strategy
• However, at the whole scheme level, the relative attractiveness of full buy-out compared to other hedging strategies improves slightly over the quarter as well
Hymans Robertson has today released its second quarterly Buy-in Monitoring Service Report. The service tracks the price of buy-ins and buy-outs for schemes looking to de-risk. The findings show a continuing improvement in conditions for schemes to de-risk via a buy-in as gilts become more expensive relative to the price of buy-ins.
James Mullins, Partner and Head of Buy-out Solutions at Hymans Robertson, comments:
“A buy-in represents an excellent hedge to the risks faced by a pension scheme and can often be overlooked as an alternative to gilts or an LDI strategy.
“By tracking prices of various forms of pension scheme risk transfer, pension managers, trustees and finance directors are able to stay better informed about when is the right time to do a deal, and which type of deal best meets their objectives.
“Most schemes hold Government gilts or other liability matching assets to broadly meet some of the future pension payments they expect to pay. It is these assets that would typically be used to meet the cost of a buy-in. The great news for pension schemes is that the cost of a buy-in relative to the value of these matching assets has fallen over the first half of 2012.
“Last quarter, we highlighted the potential for a scheme to sell £100m of gilts and purchase a buy-in policy for £98m that provided an excellent match for the same level of pensioner payments.
“Over the course of Q2 2012, the opportunity for this type of transaction has improved yet further. The price of a buy-in that insures older pensioner payments would now require even less gilts to match the same level of pension payments.
“Put simply, a scheme is now able to reduce risk whilst also improving its own balance sheet. This represents a great opportunity for trustees and scheme sponsors.
“However, whilst the trend over the past two quarters indicates improving conditions for buy-ins, these terms will fluctuate as a result of different market forces. Pension schemes that are well-prepared and that continually monitor buy-in pricing that will be best placed to take advantage of these kinds of opportunities in future.”
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