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FTSE 100 firms offload pension risk

Written by Adrie van der Luijt

Thursday, 08 May 2008

The market for transferring pension scheme risk to an insurance company has accelerated sharply over the past six months.

UK actuarial consultants Lane Clark & Peacock (LCP) predicts in its Pension Buyouts 2008 report that it is set to grow rapidly. The firm advised on 50 per cent of all UK insured buyout market transactions over £50m in 2007.

Four-fold increase on 2007 volumes

The report, prepared using detailed data provided by leading insurance companies, shows that at least ten FTSE 100 pension schemes are evaluating comprehensive quotations to buy out some or all of their pension liabilities during 2008.

The largest buyout transaction completed to date has been the £800 million deal to insure current pensioners in the P&O Pension Scheme, but LCP’s report finds that this milestone might soon be eclipsed: seven quotations have been issued by insurers for potential transactions over £1 billion.

LCP predicts that the pension buyout market in 2008 will exceed £10 billion, achieving a four-fold increase on 2007 volumes.

Competitive market rates, innovative structures and the ability to partially transfer risk to an insurer without needing to close down the pension scheme are cited as key drivers for companies and trustees pursuing a buyout.

LCP highlights that the potential for further growth in the market is huge – £10 billion is still less than 1 per cent of the potential market of private sector DB pension schemes.

Question of timing

The credit crunch has also stimulated market growth, allowing insurance companies to use the higher yields available on investment grade corporate debt and other assets to reduce their prices.

Clive Wellsteed, who heads the pension buyouts practice at LCP, says that while many commentators were predicting a year ago that the pension buyouts market would be a slow-burner, now the question is whether insurers can keep pace with demand from companies and trustees to offload risk.

LCP sees the decision of whether to pass risk to an insurance company through buyout as simply a question of timing. Most DB pension schemes are closed to new members and were already expecting to buy out with an insurer in the long term.

“Favourable pricing now provides an opportunity to transfer some or all of the risk away much sooner. It’s not a question of if these schemes will buy out, but simply a question of when,” Wellsteed concludes.

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