Mercer identifies 'clear global trend' in pension fund de-risking
GLOBAL - Pension fund sponsors in Europe and the US are stepping up the pace of their moves to de-risk, with an increasing number of large bulk annuity and longevity swap deals taking place, according to Mercer.
The consultancy said it had identified a "clear global trend" in sponsors of defined benefit plans to accelerate their intentions to manage pension risk and transfer it to external parties.
Mercer said news this month that General Motors Co intended to discharge around $26bn (€20bn) of defined benefit pension liabilities to individual plan members and the Prudential Insurance Company of America was the latest in a series of high-profile companies proactively managing their pension obligations in the US and Europe.
Frank Oldham, global head of DB risk and senior partner at Mercer, said: "The market for transferring pension risk away from plan sponsors has developed significantly in the UK in recent years, with the number, size and sophistication of these deals all moving on in leaps and bounds.
"Other European countries - particularly the Netherlands and Ireland - are also starting to see more activity and interest in this area, and so it was therefore just a matter of time before these developments transferred to a latent US market."
Mercer said there had been a significant increase in the size of bulk annuity and longevity swap deals in the UK, according to its data.
Since 2007, nearly 100 bulk annuity and longevity swap deals over £50m (€62m) had been made in the UK, with an increasing number of FTSE companies completing them, the firm said.
Last year, around 150 deals worth a total of £10.2bn were made, including major deals by ITV and Rolls Royce, it said.
The trustee model was a key difference between UK and US markets for transferring pension obligations, Mercer said.
David Ellis, head of insurance-based de-risking in the UK, said: "UK plans have trustees that are independently charged with securing plan benefits, and, therefore, transferring pension obligations to a third-party such as an insurer can be a desirable option."
In the US, many sponsors have been hampered by the fear that the equity and debt markets might react adversely to this kind of move, he said.
"The initial market reaction to the General Motors announcement demonstrates this has not been the case and so opens the door for further action," Ellis said.