EUROPE - Pension scheme buyouts will overtake less costly buy-ins as pension funds wrestle with legacy issues and the cost of running defined benefit schemes, according to a report published today by LCP.
Unlike buy-ins - which are relatively straightforward - buyouts usually require a cash injection from the scheme sponsor in return for divesting future running costs.
Although buy-ins have dominated the five-year-old market to date, the report anticipates an increase in the number of buyouts as funding levels improve and companies hive off their pension schemes to facilitate corporate activity.
LCP partner Charlie Finch said: "At the moment, any kind of corporate restructuring requires companies to go to the pension scheme trustees and negotiate," adding, "Getting rid of the scheme makes corporate activity easier."
Today's report claims likely changes as a result of Solvency II had already been priced in, even if change is an underlying investment strategies result in pricing differences between insurers.
"Solvency II will be onerous for insurers, which have a big task ahead of them and need to think about how they optimise the provisions," said Finch.
"But the additional reserves Insurers will need as a result have already been factored into the price. So it's difficult for insurers but good for pension funds."
Pointing to Goldman Sachs' acquisition of Paternoster as evidence of consolidation in the £30bn (€33.6bn) buy-out market, he identified increased competition, with at least three insurers competing for every contract.
"Trustees are now comfortable with the concept - and it helps that insurers withstood the financial crisis fairly robustly," he said, adding that proof of concept had been one of the big drivers of the subsector.
In recent years the global buy-out market has been driven by UK pension schemes under pressure to de-risk. However, the report identified opportunities for providers in the Netherlands, the US, Switzerland and the Nordics, driven by a desire to transfer pension risk and reduce the costs of operating corporate schemes.
"I think we'll see domestic multinationals taking the approach from the UK to other markets," said Finch, arguing there was "huge potential" for deals in Ireland.