Pensions - Articles - Record Q2 predicted for pension scheme de-risking

 4.5bn of risk transfer deals completed over last year and pipeline strongest since financial crisis

 Key findings of the "Managing Pension Scheme Risk Report Q1 2011": 

 
•   The second quarter of 2011 looks set to be a record quarter for the number of buy-in and buy-out deals completed
 
•   The pipelines for new risk transfer deals are at by far the highest levels since before credit crisis, with several £multi-billion buy-in deals currently testing the market
 
•   Several potentially significant longevity swap deals have reached exclusivity stage, so Hymans Robertson fully expects some material longevity swap transactions to complete within the next six months
 
•   Insurance companies and banks have taken on the risks associated with around £30bn of pension scheme liabilities since 2006/2007 and is expected to rise to £50bn before the end of 2012
 
•   "Enhanced buy-ins", which make use of impaired life annuities, are ballooning in popularity given their ability to significantly reduce the buy-in cost for many UK pension schemes
 
•   The year to 31 March 2011 saw £4.5 billion of risk transfer deals, the vast majority of which related to buy-ins
 
•   In a groundbreaking deal, the London Stock Exchange Group completed a £203m buy-in to insure all its pensioner liabilities with Pension Insurance Corporation (PIC), with the added feature that PIC will automatically insure non-pensioner members as they reach retirement
 
•   This deal saw the London Stock Exchange Group become the 19^th FTSE 350 company to complete a material risk transfer deal for its pension scheme
 
•   Hymans Robertson expects one in four FTSE 100 companies to complete a material pension scheme risk transfer deal before the end of 2012
 
•   Members of defined benefit pension schemes will increasingly rely on insurance companies and banks to provide their pensions

 The second quarter of 2011 is expected to set a new record for the number of pension scheme de-risking deals completed. Several schemes already have deals in the pipeline and a surge in longevity swaps is particularly likely to occur.

 The first quarter of 2011 saw £350 million of risk transfer deals completed, comprising buy-ins, buy-outs and longevity swaps, according to Hymans Robertson, the UK's leading independent experts in pensions and benefits.

 James Mullins, Head of Buy-out Solutions, at Hymans Robertson, comments:

 "Our analysis illustrates that it won't be long before £50billion of pension scheme risk has been transferred to insurance companies and banks. 2010 was the third successive year during which £8billion of pension scheme risks were transferred via buy-ins, buy-outs and longevity swap deals.  2011 is likely to see a substantial increase above these levels.

 "There are several multi-billion pound buy-ins and longevity swaps currently being tendered and expected to complete during 2011.  Furthermore, many providers acknowledge that they are currently devoting serious resource to around 20 similar projects for some of the UK's largest pension schemes.

 "Based on the level of activity currently in the market, we expect one in four FTSE 100 companies to have completed a material pension scheme risk transfer deal by the end of 2012.  This is due to a number of drivers. One is that market conditions have improved over the last year. Coupled with some great innovation, this means that risk transfer deals are more affordable for many UK pension schemes.

 "Banks and insurers continue to offer new flexibility to make risk transfers accessible and more affordable to all pension schemes.  It is crucial that companies and trustees are aware of this flexibility and innovation to ensure that they do not miss excellent opportunities to reduce risk. In addition, schemes are increasingly keen to manage away as much risk as they can.

 "There is a snowball effect here: the more schemes that tackle risk, the more pressure there is on others to follow suit.  The raft of final salary closures over the last two years, and the impending restrictions on tax relief for high earners' pension contributions, are raising serious questions for companies over the merits of continuing to run significant risk within their DB pension schemes."

 The Hymans Robertson "Managing Pension Scheme Risk" quarterly report shows that the market for buy-in/buy-outs during the year to 31 March 2011 was dominated by Rothesay Life, Aviva, Prudential Pension Insurance Corporation (PIC), Legal & General, MetLife and Lucida.  Rothesay Life led the field with over 30% of market share, by value, during the year to 31 March 2011.  Given the ever increasing demand from pension schemes to transfer their risks, it would be no surprise to see new entrants to this market during 2011

 James Mullins added:

 "Trustees and managers need to understand the risks inherent in their schemes and how these fit with offers from providers, to ensure they are best placed to capitalise on risk transfer opportunities.

 "We expect to see more of the UK's largest companies completing risk transfer deals for their pension schemes during 2011 and beyond. It would be no surprise to see new records set in terms of the size of longevity swaps, buy-ins and ‘DIY buy-ins' (i.e. where a pension scheme combines a longevity swap with an investment strategy that matches the cashflows that the pension scheme is required to pay to its pensioners each year)."

 "Longevity is widely viewed as one of the biggest unmanaged risks schemes face. While we will undoubtedly see an upswing in companies offloading longevity risks, one of the obstacles to pricing longevity swaps is predicting life expectancy correctly. Companies and trustees need to understand their scheme's particular longevity risks which are based on the unique characteristics of their membership. The market leading work of our sister company, Club Vita, for example, helps minimise "basis risk" inherent in any life expectancy assumption, and ensures pension schemes can assess the potential value of a longevity swap correctly - putting trustees and company sponsors on an equal footing with counterparties to these £multi-million transactions"

 Buy-outs / buy-ins-Deals during Q1 2011

 The total value of buy-out and buy-in deals struck in Q1 2011 was £350 million (around £4.5 billion during the year to 31 March 2011):

 * Pension Insurance Corporation's Q2 2010 figures are estimates.

 ** MetLife figures include deals for Alico (formerly AIG) following MetLife's acquisition of Alico, completed on 1 Nov 2010.

 Longevity swaps-Deals during Q1 2011

 There was one longevity swap deal struck in Q1 2011 which covered liabilities worth £70m (and deals which covered liabilities worth around £7.2 billion since 30 June 2009):