UK - The current levels of buyout activity is "unsustainable and temporary" as insurance regulation will start pushing prices back up and make it an unattractive option for schemes,Punter Southall has claimed.
Research by Punter Southall Transaction Services (PSTS) suggested the average 10% discounts offered by buyout firms are "distorting the market in the short-term" and causing large insurers such as Prudential to withdraw from the market on the basis it is"uneconomical".
That said, the report entitled The End Game? An analysis of the bulk buyout market and other de-risking solutions claimed the discounts are only temporary as they are a way for insurers to"build their business profile and gain market share".
In particular, Punter Southall claimed the current low prices are unsustainable given the regulation of the insurance industry by the Financial Services Authority, which requires firms to hold a certain level of reserves.
The firm pointed out these restrictions combined with profit requirements - as insurers are currently accepting "very low returns on capital to secure the discounts - "severely limits" the price insurers can charge for a buyout.
The report also pointed out the majority of deals agreed in the first half of 2008 have been related only to the buyout of pensioners - which represent the lowest level of risk for insurers.
Despite focusing on this section of pension scheme membership, Punter Southall warned insurers also face the threat of increased longevity, and highlighted Legal & General's decision to increase its mortality assumptions for its reserves, which reduced its 2007 profits by £269m.
In addition, Punter Southall claimed the recent surge of buyout activity - estimated at £2.5bn (€3.16bn) in the first half of 2008 and predicted to pass £10bn by the end of the year - is having a "negligible effect" on the overall pension liabilities of private sector defined benefit schemes.
It said the potential buyout market is estimated at more than £1trn, but instead of reducing this through buyout deals, the firm said the total liabilities of UK schemes had actually increased over 2007.
As a result, Punter Southall claimed for most sponsoring employers "buyout will remain an unattractive option for the foreseeable future as it involves passing substantial value to an insurance company", when schemes could instead adopt a similar approach to the insurers and manage the fund into surplus, which could then be released to the employer.
However, the report admitted every company has a price at which it is willing to offload its pension liabilities, particularly if accounting standards and/or cash funding standards are further strengthened in the future, as proposed by the British Accounting Standards Board (BASB) earlier this year.
But at the moment it warned that for most companies the ideal price is still below the current pricing levels and therefore concluded that the "muted level of current activity in the buyout market does not bode well for the aggressive expansion plans of some insurers".
It also warned some of the new entrants have written very little business to date, and if this trend continues "some of the less successful insurers may be forced out of the market soon", which in turn would reduce competition and increase prices.