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Interest in pension buyouts doubles

Tuesday, 01 April 2008

Double the number of UK pension schemes are preparing for buyout within the next 10 years than were a year ago.

Some 62 per cent of delegates at a Watson Wyatt seminar said they were preparing to buy out their pension liabilities with an insurer during the next 10 years, up from the 31 per cent who said they were doing so at a similar Watson Wyatt seminar a year ago.

Competitive marketplace

Nearly half the delegates said the maximum amount they would pay an insurer to take pension liabilities off their hands was between 110 per cent and 120 per cent of their IAS19 liabilities.

With a competitive marketplace having reduced the premium for buying out liabilities, it is thought that some recent deals have been transacted at between 115 per cent and 120 per cent.

Watson Wyatt's corporate consulting group gauged the views of company pension sponsors at a recent seminar attended by nearly 100 senior representatives of companies with defined benefit pension schemes.

The route to settling pension liabilities has been rising up the corporate agenda. Three quarters of delegates said either that the possibility of buying out liabilities had been discussed at a board meeting (45 per cent) or that they expected this to happen within the next 12 months (29 per cent).

Some 8 per cent of delegates said their pension scheme is now the single biggest issue facing the board, with a further 56 per cent saying it is a big issue.

Level of security

When companies and trustees consider settling liabilities, the level of security afforded to scheme members is a principal concern.

Of the attendees at the seminar, which took place at the end of March, three out of four said the level of security was the most important criterion against which they would assess providers if price was not an issue.

Steven Dicker, a senior consultant at Watson Wyatt, said that not long ago, the cost of removing pensions risk from the corporate balance sheet was seen as prohibitive.

“Competition and more attractive pricing may now have brought buyout within reach of more companies,” he added.

Bulk buyouts of around £3.5 billion of defined benefit pension liabilities were transacted in 2007. This represents less than 0.5 per cent of all defined benefit pension liabilities.

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