After a slow start to the year, the UK’s defined benefit
pension scheme risk transfer market is again a hive of activity
with all signs pointing to a sustained high level of activity.
Likely to take centre stage, believe market experts, are longevity
swaps, the first of which in many months was recently
completed.
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A prediction made at the start of 2011 by actuarial consulting
firm Hymans Robertson that it would be a busy year for the UK’s
defined benefits pension scheme risk transfer market is proving to
be correct. After a slow start to the year, activity escalated in
the second quarter to become what the firm describes as an
“incredibly” busy one for market participants.
During the second quarter of 2011, Hymans Robertson
recorded £1.4bn ($2.3bn) of buy-ins and buyouts risk transfer deals
completed. This represented an increase of 295% in the value of
deals completed, compared with deals worth the £346m completed in
the first quarter of 2011.
In 2010, £8.2bn of pension scheme
risks were transferred of which buy-ins and buyouts accounted for
about £5.2bn and longevity swaps about £3bn. The value of risk
transfer deals completed in 2010 represented an increase of 9.3%
compared with 2009 and equalled the previous record set in
2008.
“The level of [second quarter 2011]
activity highlights how several schemes have taken the opportunity
to de-risk at what appears to have been an opportune time to do
so,” said Patrick Bloomfield, partner and head of trustee
solutions, at Hymans Robertson. “Market conditions were favourable
throughout the quarter.”
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By GlobalDataAccording to risk transfer
specialist insurer Pension Insurance Corporation, pension insurance
for whole scheme transactions at the start of the second quarter of
2011 was at its most affordable since the summer of 2008 – just
prior to the collapse of Lehman Brothers which triggered the global
financial crisis.
In total, 40 deals were completed
in the second quarter of 2011 with the largest number, 24,
undertaken by Legal & General (L&G). However, in terms of
value of deals completed by L&G (£213m) it ranked only
fourth.
Top value position was taken by
Pension Insurance Corporation which completed four deals worth a
total of £426m.
UK insurer Prudential, which
re-entered the UK risk transfer market in 2010 after a two year
absence, came in second with a single deal worth £280m. Hard on its
heels was US insurer MetLife which notched up five deals worth a
total of £277m.
Strong growth
ahead
“We are likely to see further
strong activity across the remainder of the year,” predicted
Bloomfield.
He continued: “Looking further
ahead, we predict schemes will continue to look to de-risk, with
one in four FTSE 100 companies completing a deal by the end of
2012.”
According to Hymans Robertson, since the UK’s
pension scheme risk transfer market began in earnest some five
years ago, insurance companies and banks have taken on the risks
associated with about £30bn of pension scheme liabilities. The
actuarial firm predicts that the total will rise to £50bn before
the end of 2012.
Also indicating that the UK risk
transfer market is set to continue growing apace is the entry of
new participants into the risk transfer market, observed
Bloomfield. He noted that Japanese investment bank Nomura entered
the market in the second quarter of 2011 and that UK insurer
Friends Life appears set to become the latest traditional insurer
to enter the market.
After a lengthy absence, longevity
swaps have also made a re-appearance in the UK risk transfer market
with the first in many quarters being completed in August this year
by Credit Suisse. The last longevity swap was completed by Deutsche
Bank’s wholly-owned unit Abbey Life in the first quarter of 2010.
Undertaken for BMW, the £3bn longevity swap remains the largest in
the UK to date.
In the latest longevity swap, ITV
Pension Scheme will make fixed monthly payments to Credit Suisse,
in return for which Credit Suisse will make payments to the scheme
that broadly match the value of benefits being paid out.
According to an advisor to the
deal, Towers Watson, the fixed payments have a present value of
about £1.7bn, making it the third biggest risk transfer involving a
UK pension scheme to date. Since June 2009 when Swiss Re completed
the first longevity swap, a total of nine deals covering
liabilities worth about £8.9bn have been completed.
Bloomfield noted that several
potentially significant longevity swap deals have reached
exclusivity stage and that “material” longevity swap transactions
are likely to be completed before the end of 2011.
Lead advisor to the ITV Pension
Scheme transaction, PricewaterhouseCoopers (PwC), predicts that
longevity swap deals will overtake traditional solutions such as
buyouts and buy-ins. The professional service firm anticipates that
about a dozen longevity deals will be completed during the
remainder of 2011 and in 2012.
Head of PwC’s pensions practice Raj Mody commented that
competition among the banks and insurers seeking to gain a foothold
in the longevity swap segment is “fierce”. This is hardly
surprising in an otherwise lacklustre insurance market.
