Market volatility 'unlikely to drive buyouts'

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  • Market volatility 'unlikely to drive buyouts'

UK - Market volatility has prompted 44% of trustees to consider transferring pension scheme risk, but consultants have warned timing is “key” so it is unlikely this will transfer into business for the bulk annuity market this year.

Research from MetLife revealed 55% of 108 online survey respondents - of which 60% were trustees - expect increased levels of activity for schemes opting for a buyout/buy-in of their liabilities by the end of 2009.

And of these, 34% who are considering a buy-in view it as a “gradual step” to a full buyout within five years.

That said, Richard Jones, head of Punter Southall Transaction Services (PSTS), warned the buyout market has “basically dropped away completely” with less than £500m (€540m) of business in the first quarter so far, mainly because the market is uncompetitive in its pricing.

He suggested this is because the big insurers are facing capital issues as analysts are focusing on the corporate bond investments held in annuity books, while the smaller specialist firms need a second raising of capital to fund new business.

Pension funds have lost money and are less sure about selling assets to buy annuities that would lock in the losses, so Jones said: “These trends mean the buyout market is not there. Whenever the market moves around trustees start thinking how they can get rid of liabilities, the big problem is the price but none of these trends look to be reversing quickly.”

Clive Wellsteed, partner at Lane Clark & Peacock (LCP), added the timing of de-risking is “key”, but suggested funds with large gilt holdings could benefit from increased purchases by the Bank of England, thereby providing an opportunity to transfer risk to a bulk annuity insurer.

However, he warned trustees need to prepare their asset portfolios ahead of a buyout to ensure the insurer will take the assets being offered in payment and that the investments are being valued the same way by trustees and the insurer, as this is becoming “one of the most important, if not the most important, stages of a bulk annuity transaction in the current environment”.

Meanwhile, the survey suggested 83% of those looking to further de-risk require a solution which increases protection for member benefits while 84% want solutions limiting the impact on the employer’s balance sheet.

Findings showed 66% would be more confident about a buyout/buy-in if they had information about the insurer’s covenant, while 53% wanted a better understanding of the process, although 91% admitted financial strength was the most important factor.

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

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