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Increased de-risking may drive up buyout costs

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UK - UK pension funds could face soaring costs for buyouts as interest in pension scheme de-risking increases, an actuarial consultancy has warned.

According to Lane Clark & Peacock (LCP), up to £15bn (€17.7bn) worth of liabilities could be insured in 2010, doubling 2009's figure. However, the rise in interest from pension funds looking to transfer their risk to insurance companies would result in demand outstripping the industry's capacity, making any buy-ins or buyouts more costly.

"The message to companies and pension schemes is that you do not want to be last in the queue - particularly if insurers become more selective over which schemes to focus on," said Clive Wellsteed, partner and head of LCP's buyout practice.

"Careful preparation now will allow you to move quickly and get strong engagement from insurers once the time is right," he added.

While LCP's report into the buyout market said that £15bn of new deals were likely to be written, the company went on to warn that prices would likely rise after only £10bn worth of transactions had taken place, while the total of private-sector defined benefit (DB) liabilities was estimated to be worth £1trn.

This year has already seen the largest longevity swap in history, with BMW initiating a £3bn trade with Deutsche Bank's Abbey Life. Important trades in 2009 saw Swiss Re cover £750m of the Royal County of Berkshire's liabilities and Babcock International come to an agreement with Credit Suisse. (See earlier IPE article: Babcock edges closer to completing longevity deals)

LCP advised any pension funds considering buy-ins or longevity swaps to act as soon as possible, but also to be prepared for scrutiny from the insurance company before a deal is finalised. 

It warned that while insurance companies such as Aviva and Legal & General were already establishing themselves in the market, all providers considered four key points before taking on new business, including the impact of the incoming Solvency II directive and the liquidity of the secondary market.

LCP highlighted the creation of the Life & Longevity Markets Association as a way of attracting and securing the additional capital needed for future trades.

"The last 18 months have demonstrated that insurers have been resilient during the worst financial crisis in memory. With over £1trn of private sector DB pension liabilities, the de-risking market is here to stay - with the advent of longevity hedging all the building blocks are now in place," said Clive Wellsteed.

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