UK - The UK's pension buyout market is expected to fall to £4bn (€4.6bn) in 2009, in the wake of the financial crisis.

This is half of the £7.9bn of buyout business written in 2008, according to a report published by consulting actuaries firm Lane, Clark & Peacock LLP (LCP). However, it still exceeds the £2.9bn written in 2007.

"The financial crisis led to a sharp gain in pricing, while insurers became less willing to guarantee the deals, " said Richard Murphy, partner at LCP.

Activity subsequently decreased in the last two quarters until the first quarter of 2009, which were dominated by two £1bn-plus deals. And in total, fewer than 20% of buyout quotations led to a completed deal in 200, of which the vast majority concerned cheaper pensioner-only deals.

In the first quarter of 2009, the slower buyout market was dominated by only six players, as others stepped back from the market amid a lack of business.

That said, the market is not all doom and gloom. Murphy said he expected the volume to pick up again later this year and predicted that 2010 would bring trading volumes similarly to that of 2008, as pressure continues on schemes to de-risk.

"Careful preparation now will allow pension schemes to move quickly as opportunities arise," he adds.

While uncertainty may surround the buyout market, longevity hedges have become more attractive to pension funds following Babcock International's announcement of the first longevity swap by a UK scheme.

"However, despite the opportunities to exclude the longevity risk via swaps, it is only currently viable for the largest 5% of schemes," said Murphy. "And so the buyout market will still remain the main route to deal with this risk."

In a buyout or buy-in, the interest rate, inflation and longevity risk as well as the assets are transferred to an insurance company in exchange for bulk annuity contracts which guarantee to pay a set of defined benefits, while in a longevity hedge only the longevity is transferred.