With the effects of the
financial crisis behind it, the UK’s defined benefit risk transfer
market continued its rapid growth during the first quarter of 2010.
Actuarial consultancies are optimistic the market will continue to
register strong growth, though there are signs that capacity could
become a limiting factor.
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In an otherwise lacklustre UK life
market, the defined benefit (DB) pensions risk transfer sector
shone in the first quarter of 2010. Actuarial consultancy Hymans
Robertson reported deals worth a record £4.048bn ($5.76bn)
completed.
Performance in the first quarter of 2010
represented year-on-year growth of 355% and continued a surge which
began in the third quarter of 2009, following four quarters during
which activity declined sharply in the wake of the global financial
crisis.
Deals completed in the first quarter of 2010
brought the total since the second quarter of 2009 to £10.93bn, a
new record for a four-quarter period. To put this performance into
perspective, the total value of DB scheme risk transferFs since the
market got going in earnest in 2006 stood at £22.3bn at the end of
the first quarter of 2010, according to actuarial consultancy Lane
Clark & Peacock (LCP).
This record breaking trend will continue during
2010, predicts James Mullins, a senior liability management
specialist at Hymans Robertson.
“Based on the level of activity we are
currently observing and the deals already completed in quarter one
2010, we expect to see pension scheme risk transfer deals to cover
liabilities in excess of £15bn during 2010,” said Robertson.
The previous annual record, £8.2bn, was set in
2008.
Robertson continued that driving strong growth
were a number of factors. In particular, market conditions have
significantly improved making risk transfer deals more affordable
for many UK pension schemes.
Longevity swaps lead the
way
Forecasting total risk transfer
activity in 2010, Robertson said longevity swaps were likely to
account for about £10bn and buy-ins and buy-outs for about
£5bn.
Longevity swaps were the biggest driver of
growth in the first quarter of 2010, accounting for £3bn of the
total (74%) in the form of a single deal completed by BMW with
Deutsche Bank’s wholly-owned unit Abbey Life. Specialist risk
structuring assistance was provided by UK insurer Paternoster in
which Deutsche Bank is the largest shareholder.
This was the largest yet longevity swap
completed in the UK since the first was executed in May 2009 by UK
engineering company Babcock International in association with Swiss
bank Credit Suisse. Six longevity swaps valued at a total of £4.1bn
were completed in 2009.
In the buy-out/buy-in sector in the first
quarter of 201051 deals totalling £1.048bn were completed. Hymans
Robertson noted that the value of buy-ins was more than three times
the value of buy-outs.
In essence, a buy-in is where a pension scheme
combines a liability driven investment strategy aimed at
eliminating investment risk with a longevity hedge aimed at
eliminating the risk that scheme members live longer than
expected.
In the buy-out/buy-in sector, UK Insurer
Aviva had a particularly successful start to 2010, leading a field
of six insurers by completing 10 deals worth a total of £350m. This
was double the total value of deals executed by Aviva in
2009.
Close on Aviva’s heels was pension UK
buy-out specialist, Pension Insurance Corporation (PIC) with two
deals worth a total of £305m. Also doing well was US insurer
MetLife with five deals worth a total of £230m. Ranking fourth was
Legal & General with 32 deals worth a total of £141m.
During the four quarters ended March 2010, PIC
led the overall buy-in/buy-out sector with 11 deals worth a total
of £1.188bn. This represented almost a third of the total of 175
deals completed by eight insurers worth a total of £3.83bn during
the period.
Growth limited by
capacity
How big the DB pension risk transfer
market can grow remains to be seen. According to LCP, the potential
market based on DB liabilities is over £1 trillion. However, LCP
estimates the maximum insurer capacity in the buy-in/buy-out sector
is £10bn annually.
In terms of longevity swaps, LCP notes that
their use is likely to remain restricted to DB schemes with a
minimum of £250m in liabilities. LCP anticipates that more
investment banks will enter the UK longevity swap market, using
insurance subsidiaries such as in the case of Deutsche Bank’s Abbey
Life and the BMW scheme.
Indicative of growing bank involvement in
longevity swaps, Rothesay Life, established as a wholly-owned unit
of US investment bank Goldman Sachs in 2008, executed two deals in
2009 worth £1.9bn. In addition, LCP noted that Swiss bank UBS has
confirmed its entry into the market while JPMorgan is already
actively quoting in the sector. Also active, but yet to strike a
deal, are PIC and UK insurer Lucida which is backed by US private
equity firm Ceberus Capital Management.
LCP believes many insurers and banks
active in the longevity swap sector will continue to reinsure part
of the risk, potentially as much as 90%. An unspecified portion of
the risk the risk in the BMW longevity swap deal was transferred by
Abbey Life to reinsurers including Hannover Re, Pacific Life Re and
Partner Re.
The need for significant participation of
reinsurers could limit the potential size of the sector. LCP noted
that six of the principal reinsurers’ willingness to reinsure
longevity swap risk is perhaps £10bn over the next year while the
maximum risk they will accept is probably about £1bn for individual
transactions.
