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Buyout prices to rise as market hits capacity

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  • Buyout prices to rise as market hits capacity

UK - Increased regulatory and accounting pressures are encouraging pension schemes to de-risk, but Pension Capital Strategies (PCS) has warned prices will edge up as a number of players reach capacity.

As barriers to entry have dropped, a growing number of providers has increased competition, produced a variety of solutions and reduced prices, the firm claimed in the first edition of its half-yearly Buyout Market Watch Report.

But although PCS suggested prices will remain low until the end of 2008 - with the gap between IAS19/FRS17 accounting values and the cost of buyout for pensioners becoming "almost non-existent" - it warned market capacity is "severely restricted" in terms of how quickly quotes can be provided to pension schemes.

The firm argues that the capacity to write business "may become an issue for some of the new start-up companies if they win significant amounts of business over the next few months" and suggested "there is a strong possibility that syndication will be the way the market will cope with the larger deals", as no individual insurer would have the "required capacity or appetite for the risk" involved.

However, the report highlighted that more than £10bn of bulk annuity business is expected to be completed by the end of 2008 - including at least one multi-billion pound buyout - while it also predicted growth in longevity hedging products as investment banks and the main buyout insurers go into partnership.

Findings from the PCS Affordability Index, which formed part of the report, claimed the cost of buyout for current pensioners could be "the best time for at least a decade". However, it warned  that if Accounting Standards Board (ASB) proposals to replace corporate bond yields with gilt yields as a discount rate are implemented, this would increase liabilities and insurers could respond "en masse by hiking up their prices".

Meanwhile the report predicted that Prudential, along with Legal & General one of the two original insurers operating in the UK buyout market, will "refocus" its approach by the end of 2008 and reverse its declining market share.

But over the next two to three years, the report warned there would be "a lot of consolidation in the market" as larger insurers target newly established organisations - a process that is rumoured already to be starting with Pension Corporation, which is believed to be targeting Synesis Life. [See earlier IPE.com article: SwissRe 'buyout' team to target European schemes]

In addition, PCS pointed out that a secondary market will develop as the main buyout insurers reinsure their books to diversify risk.

Charles Cowling, managing director of PCS, said: "Companies need to face their pension commitments head-on, particularly if they are looking at re-structuring or merger opportunities. Increasingly this means looking at buyout opportunities."

"The index suggests now is the best time to buyout for at least a decade and may even represent a lower cost than the published accounting figures. However, we are already seeing signs of consolidation in the market and so, in the long term we expect prices to increase as some participants reach their capacity and others drop out of the market," 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 nyree.stewart@ipe.com

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