UK - The buyout market will exceed £10bn (€12.6bn) in 2008, as at least 10 FTSE 100 companies are considering offloading their pension liabilities, Lane Clark & Peacock (LCP) has claimed.

In its first annual report on the buyout market "Pension Buyouts 2008", LCP noted growth in the sector has "accelerated sharply" over the last six months, and is expected to "grow rapidly" through the rest of the year, as £4.1bn of business had already been written in the first quarter.

The report, which is based on detailed data from insurance companies, showed at least 10 FTSE 100 companies are evaluating buyout quotations for some or all of their defined benefit (DB) pension schemes, while insurers have issued at least seven quotations for potential transactions in excess of £1bn.

As a result, LCP claimed the market had reached "critical mass" both in terms of the business volumes being transacted and the visibility of buyout as an option in the boardroom and to trustees.

It added first quarter results  for 2008 - shown to be a seven-fold increase on the £600m business written in the six months to September 30 2007 - means the market is "on target" to exceed £10bn, however it added this is still less than 1% of the potential market of private sector DB schemes.

The report argued with a total volume of potential business of more than £1trn from private sector pension liabilities, even at a rate of £10-15bn of buyout business per year it would potentially take over 70 years before all DB pension schemes are transferred.

But the actuarial consultancy firm highlighted competitive market rates, "innovative structures" and the ability to partially buy-out pension risk are "key drivers" for sector growth, and predicted the first major FTSE 100 buyout is "inevitable and likely to be imminent".

Figures from the report suggested the typical buyout cost for pensioners is 110% of the IAS19 liability value, and LCP estimated approximately 30% of FTSE 100 UK pension funds are already funded at this level or above.

The research revealed in 2007 Paternoster dominated the sector with a 50% market share by value, closely followed by Legal & General (L&G) with 40%, while Norwich Union and Aegon both had a 3% share, and Prudential took just 2% of the market.

However, LCP pointed out despite being part of the original buyout duopoly, alongside L&G, Prudential "largely left the market in 2007" as the insurer said it "chose not to write business at uneconomic levels".

But the firm predicted there would be a "hardening of prices" towards the end of 2008 as demand picks up and insurers "discount less aggressively", although at the moment it argued if the credit crunch persists insurers will be able to keep their headline prices low as they can access higher yields.

In addition, as larger schemes start to consider buyouts, LCP highlighted a potential new trend could be the "advent of syndicated buyouts" where schemes split the risk between two or more insurers, although the report suggested that choice might be reduced as some insurers either leave the market or consolidate with competitors if they are "unable to reach critical mass".
Clive Wellsteed, partner and head of the pension buyout practice at LCP, pointed out a year ago many in the industry were predicting the buyout market would be a "slow-burner", but instead the question is now whether insurers can keep pace with the demand from companies and trustees to offload risk.

"Most DB schemes are closed to new members and were already expecting to buy out with an insurer in the long-term. Favourable pricing now provides an opportunity to transfer some or all of the risk away much sooner. It's not a question of if these schemes will buy out, but simply a question of when," he added.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email