Buyout market holds course - Mercer

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  • Buyout market holds course - Mercer

UK - Pension risk transfer prices remain broadly stable in spite of the recent financial events and the current market volatility, according to Mercer.

According to Mercer, falling bond yields - which primarily drive the price cost of buyouts and buy-ins - mean bulk annuity prices have only been slightly affected.

Unlike in 2008, when several risks emerged in the corporate bond sector making insurers nervous and resulting in rising bulk annuity prices, the current market remains relatively stable.
Mercer sees this as good news for schemes currently involved in a transaction as long as they have moved out of equities.

However, the firm also stresses that UK pension schemes planning to enter into a future transaction should check they have the right asset strategy to ensure they are not caught out by future market movements.

Akash Rooprai, principal in Mercer's de-risking group, said: "Schemes should consider as a matter of course how to manage the investment of assets leading up to the purchase of a bulk annuity.

"To minimise the impact that volatility has on the difference between assets held and insurance costs, a strategy consisting of a portfolio of corporate bonds, gilts and possibly with some relevant derivatives as the purchase approaches, would be prudent.

"This minimises the potential for market movements making the planned transaction unaffordable, although of course this also removes the potential for gains", Rooprai added. "That said, once a scheme has decided to purchase a bulk annuity, it is not investing for asset gains, but to achieve the objective of purchasing the bulk annuity at an affordable cost."

Mercer also notes that equity values have fallen by around 10% over the last month, amd that other assets, such as hedge funds, derivatives and commodities, have also been affected.

Schemes exposed to such assets have therefore seen the value of their assets reduce relative to their liabilities.

As a result, Mercer recommends pension schemes plan their asset transition as buyout transactions can take several months from inception to contract.

Rooprai added: "Schemes that plan ahead and carry out work before a bulk annuity purchase will see a quicker, less risky and more cost-effective transaction - they will be able to move rapidly when a transaction becomes affordable."

Yesterday, the pension scheme for UK broadcaster ITV announced it entered into a £1.7bn (€1.9bn) longevity swaps deal with Credit Suisse.

The announcement came the same day as a £30m buyout agreed by Nova Chemicals' scheme.

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