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  • Market capacity no issue for buyouts

UK - The pensions buyout market is more likely to be constrained by "unattractive prices" than by market capacity, according to Punter Southall Transaction Services (PSTS).

At a seminar called The End Game? for pensions, in particular the buyout market, PSTS - the specialist transaction consulting arm of Punter Southall Group - also described estimates of the buyout market hitting £10-15bn in 2008 as "fairly spurious".

Martin Hunter, an actuary at the firm, said most insurers are at the moment chasing the "holy grail" of the buyout market - the £1bn (€1.26bn) pension scheme - as the majority of business written in the first half of 2008 and end of 2007 has been "heavily influenced" by a few large deals, such as P&O and Rank.

He pointed out even with the recent discounted prices in the market, the vast majority of deals still only tackle liabilities related to pensioners, which suggests "the price for deferred members is still too expensive" for most schemes.

In addition, Hunter said the discounts available six months ago from buyout companies wanting to stimulate the market "are no longer available for most pension schemes".

One of the firm's clients, for example, looked into the buyout option, gathered some quotes and decided to go ahead with a buyout of its pensioners, only to find when it went back a month later for a definite quote the price had gone up and it was then no longer attractive to the scheme or trustees.

Concerns have also been raised about the potential consolidation of the buyout market, following reports of the apparent acquisition of Synesis Life by rival firm Pension Corporation.

But Hunter said further exits are "unlikely in the short-term" as multi-line insurers - such as Legal & General and Prudential that have other businesses - can easily enter or exit the market by raising and lowering the price of their quotes.

In addition, he claimed there is "no issues regarding market capacity in the short-term" as single line insurers - those who are pure buyout insurers such as Paternoster and Rothesay Life - have enough capital to write £50bn of business, out of a potential market of £1trn.

That said, Hunter admitted there may be some insurers in this market who may have used up their capital more quickly than intended, by offering discounted rates to schemes in order to stimulate the market.

But the need for additional investment could in turn could drive prices higher, particularly if investors require a minimum rate of return on the buyout deals, a reason it is understood why Synesis Life has so far been unable to complete a transaction.

Hunter added: "Higher prices means buyouts may be less attractive for trustees, and coupled with potential losses from the volatile equity markets, this could make them more unaffordable."

Meanwhile, Richard Jones, head of PSTS, said in a buyout deal at normal prices of 135% of FRS17 liabilities, the employer is transferring around 15% of the accounting value of the scheme to the insurer, through the increased pricing yield used by insurers compared to the expected return on low risk assets.

"For most people, this is an expensive option and this is why only 0.6% of the market has been transacted. I don't think we'll see £10bn of business in 2008. I don't think we'll see it reach double figures," said Jones.

He suggests although there are some good reasons for getting rid of pension liabilities, employers should instead consider a lower-cost in-house alternative where the scheme is funded to a high level in a manner similar to a buyout but then manage it themselves by adopting a similar low-risk investment strategy.

Any surplus is then not recorded on the balance sheet, so it is not affected by any short-term volatility, according to Jones.

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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