Reversing what has been a phenomenal growth trend, activity in
the UK’s defined benefit pension scheme buyout market fell
precipitously in the first half of 2009. However, consultancy
Hymans Robertson believes that with scheme sponsors and trustees
looking to lower risk-exposure it is only a temporary setback.
After almost trebling in size to £8.2 billion ($14 billion) in 2008
the UK’s defined benefit (DB) pension scheme buy-out and buy-in
market experienced a significant setback in the first half of 2009,
reveals data compiled by pension and risk management consultancies
Aon and Hymans Robertson.
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A sharp decline in activity became evident in the first quarter of
2009 with the value of deals completed sliding by 41 percent, from
£1.5 billion in the first quarter of 2008 based on data from Aon to
£890 million based on data from Hymans Robertson.
The deteriorating trend accelerated in the second quarter of 2009
with the value of deals declining by an even sharper 78 percent
from £2.7 billion to £604 million. Though the latter total from
Hymans Robertson excludes new business from Prudential, the
consultancy believes that the addition of Prudential will not make
a material difference.
Overall, at £1.49 billion the value of deals in the first half of
2009 was down by almost two-thirds from the £4.2 billion recorded
in the same period in 2008.
During the first half of 2009, deals were recorded by six insurers
participating in the buy-out/buy-in market with Legal & General
(L&G) retaining its leading position with 41 deals valued at a
total of £704 million. L&G’s first half performance gave it a
47 percent market share compared with a 22 percent share in 2008 as
a whole.
Also putting in a particularly strong showing in the first half of
2009 was US insurer MetLife, which entered the UK market in 2008.
MetLife ended the first half of 2008 with 3 deals to its credit
worth a total of £278 million – giving it a market share of almost
19 percent compared with only 3 percent in 2008.
Notably, the number of insurers participating in the buyout/buy-in
market fell from 11 in 2008 to nine in the first half of 2009. This
follows announcements by Paternoster that it would be closing to
new business and Swiss Re that it was scaling back on
pension-related activities by shutting down its variable annuities
and pensions business.
Market will recover
Commenting on the market’s performance in the first half of 2009
Richard Shackleton, a pension scheme settlement solutions
specialist at Hymans Robertson, attributed the slide in new
business to significantly increased pension scheme deficits and
corporate cash constraints.
He added that new business in 2009 as a whole is likely to be
dominated by pension schemes that have already taken steps to
de-risk – and thus did not suffer equity value falls during 2008 –
and pension schemes whose sponsoring employer has become
insolvent.
However, despite the current slump in new business he added that
Hymans Robertson expects all forms of pension scheme de-risking to
continue increasing in the medium term. The key driving factor, he
explained, is recent investment market volatility which has
resulted in companies and trustees having an even greater desire to
reduce risks.
Shackleton said that of particular note in the shift towards
greater risk aversion are steps that have been taken by two
companies that, as he put it, “specialise in recognising and
managing other peoples’ risks.” These are UK insurers Friends
Provident and Royal and Sun Alliance (RSA) which completed deals in
May 2008 and in July 2009, respectively, to reduce risk in their DB
schemes.
The RSA transaction involving insurance of £1.9 billion of pension
liabilities is particularly significant in that it represents the
largest deal yet seen in the UK buy-out market. The deal,
representing 55 percent of the total current pensioner benefits of
RSA’s UK DB schemes, was almost twice the size of the previous
record – a £1 billion buyout executed by Prudential in September
2008.
The RSA buy-out was undertaken by Rothesay Life and structured as
an insurance contract covering the liabilities under which the
trustees of the DB funds retain ownership of the assets comprising
gilts and UK government guaranteed bonds. Rothesay Life, a
wholly-owned unit of US investment bank Goldman Sachs, was
established in 2008.
Do-it-yourself alternative
Of significance during the first half of 2009 was that while
insurers experienced a sharp fall in new buyout/buy-in deal
activity involving so called do-it-yourself (DIY) DB scheme buy-in
de-risking was brisk.
Hymans Robertson defines a DIY buy-in as one 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.
According to the consultancy, the majority of the insurance
companies in the buy-out market now also offer longevity
hedges.
The most notable DIY solution was executed in May 2009 by UK
engineering company Babcock International in association with Swiss
bank Credit Suisse. The solution involves capping Babcock’s
exposure via longevity swaps, whereby its DB scheme will receive
payments from Credit Suisse should the members and dependents
covered live beyond a pre-defined age. Longevity risk of £750
million is covered by the solution.
“Longevity hedging is likely to continue to receive significant
interest during the remainder of 2009 and beyond,” said Shackleton.
He added that longevity hedging deals will be most common for large
pension schemes who believe that the best way for them to de-risk
is to carry out a DIY buy-in.
“However, we fully expect several larger traditional buy-in deals
to be transacted during the remainder of 2009,” said Shackleton.
“This is a view that is shared by several of the insurance
companies.”
