UK – Two UK pension funds have entered into de-risking contracts with insurance companies at a time when research shows that buyout activity has been accelerating this year.
The pension fund of UK insurer LV= has completed a £800m (€993m) longevity insurance contract with Swiss Re, which covers 5,000 members of the scheme and includes insurance of longevity exposures for 1,000 members who are still to retire.
According to Russell Higginbotham, Swiss Re's UK chief executive, the agreement is the first pension plan longevity contract that insures the exposure of members yet to retire.
Meanwhile, the Tate & Lyle Group pension scheme has entered into a £347m buy-in with Legal & General (L&G).
Under the agreement, the trustee of the scheme will hold the L&G bulk annuity policy as an investment to hedge 43% of the pensioner liabilities.
The buy-in involves the purchase of a bulk annuity policy under which L&G will pay to the trustee amounts equivalent to the benefits payable to three out of every seven of the group scheme's pensioner members.
L&G said the £347m premium for the annuity policy would be paid by the trustee in a combination of assets and cash from the scheme.
These new contracts come at a time when UK pensions schemes are looking increasingly to de-risk.
Research conducted by JLT Pension Capital Strategies shows that more than £900m of buyout deals were done in the third quarter alone.
JLT noted in its report that, after a slow start in Q1, buyout activity picked up during the second and third quarters, in spite of a cost increase.
According to the report, prices have remained relatively stable throughout 2012, though bulk annuity prices are higher than 12 months ago, mainly due to falling bond yields.
Pensioner buy-ins remain the most popular contracts because of their affordability relative to full buyouts, JLT went on to say.
The firm nonetheless stressed that 2012 business levels look set to be lower than previous years, based on business written during the first three quarters of the year, as concerns over the euro-zone crisis mean conditions will remain difficult.
As a result, buyouts may remain unaffordable for many schemes, especially if additional cash is required from sponsors, which may be unwilling to release capital in the current economic climate, the report said.
Martyn Phillips, head of buyout consulting at JLT, said: "Whilst low yields have led to higher absolute prices compared with 12 months ago, schemes with significant Gilt holdings will have seen significant growth in assets, so the affordability of the buyout route may actually have increased over the period.
"These well-matched schemes are expected to continue to consider opportunities to de-risk via the purchase of a bulk annuity."