Buyout still too costly to take off – Aon
UK - Too few pension schemes see buyout as realistic and affordable for the buyout market to reach the widely-predicted boom, suggests consultancy firm Aon.
A new study, which collected data regarding cases placed and quotations obtained direct from the leading providers in the buyout market, shows over the last six months there has been little sign of increased volumes of buyout cases being placed.
"Lack of growth in the market can be explained by a number of barriers," argues Paul Belok, principal and actuary for Aon Consulting.
"These include the fact that many schemes remain open to future accrual for at least some employees, as well as the potential emergence in some circumstances of cheaper alternatives to buyout," he continued.
An example of a cheaper alternative is Citigroup's recent acquisition of Thomson Regional Newspapers' pension fund, suggests Aon.
Moreover, Belok says the decision-making and implementation process in relation to buyouts can also be very laboured, often extending over months if not years.
Secondly, the study found cases which have been presented for potential buyout have been relatively small as the scheme's size is, on average, only £4m (€5.7m).
This contrasts with the average size scheme quoted for by buyout providers, which hovers around £40m.
"The question is how much extra money, over and above what the scheme's already have under management, is needed for the sponsoring employer to put in to bring it up to stakes where it can afford to buyout," said Belok.
These funding levels vary from one scheme to another and a potential buyout depends on the circumstance of the sponsor and the fund.
"It is also fair to say that larger schemes have a longer lead-time, say you have to put in another 20% of the fund, 20% of £4m is different than 20% of £100m, so the amounts consequently are going to be magnified," he continued.
Smaller schemes tend to be associated with smaller employers, but some of those are part of a larger group: "In some ways the smaller schemes might have found it easier to bridge the gap and fund the extra costs to take the scheme up to the stakes where it can afford a full buyout more quickly than some of the bigger schemes have yet to do," concluded Belok.
Nonetheless, with the reduction in pension scheme buyout deficits during the middle part of 2007, Aon says it should be anticipated schemes and their sponsors will increasingly investigate buyout as a funding option.
Aon's latest study of the buyouts sector comes as Peter Black, principal of punter Southall, comments on the impact of the recent market turmoil on pension funds.
Black said the credit crisis highlights some of the problems inherent in the assumptions used for valuing pension liabilities on a balance sheet.
"Whilst the long-term cost of securing liabilities in full has increased, the position in a company's books has actually improved. We estimate that buyout deficits for FTSE 100 pension schemes have increased by around £14bn over the last month, while conversely accounting surpluses have improved by around £8bn."