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Illiquidity stops buyouts from hitting £10bn

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  • Illiquidity stops buyouts from hitting £10bn

UK - The buyout market is expected to miss the £10bn (€10.6bn) mark predicted earlier this year, following a lack of liquidity caused by the global financial crisis, according to Aon Consulting.

Final numbers will be published by the consulting firm in early 2009, however Aon suggested the buyout market appears to have achieved only £8bn of new business in 2008 - around £2bn short of the estimated target outlined in May. (See earlier IPE article: Buyout market to pass £10bn in 2008)

Aon blamed the expected shortfall on the global economic problems, as the anticipated second-half growth failed to materialise on the back of a "slowdown" in corporate bonds; one of the asset classes used by insurers to back annuities.

The consulting firm claimed the lack of liquidity and uncertainty around pricing and increased default risk for corporate bonds "had a knock-on effect on bulk annuities from mid-September".

It said increasing prices were accompanied by insurers withdrawing guarantees on the assumptions underlying the quotations, and the buyout companies were less prepared to accept any "out of market" risk.

It has not stopped all trading, however, as Pension Insurance Corporation (PIC) last week completed the largest buyout of Thorn pension scheme to date, valued at £1.1bn, and has now agreed the buyout of the smaller Merchant Retail Group Pension Scheme - part of the A.S Watson Group - which was turned around in just a few weeks. (See earlier IPE article: PIC snags remaining Thorn)

That said, the consulting firm claimed while deals have continued for small to medium schemes, if the Thorn buyout had not occurred the fourth quarter figures would have been "very disappointing".

Aon acknowledged bulk annuities are still valid for certain schemes "providing the pricing and terms remain attractive", but noted schemes which need to sell growth assets such as equities or property to pay the buyout premium are reluctant to do so at the current low valuation.

Official have suggested in the short-term transactions which are "most likely to proceed" are those involving schemes that "already hold significant bond assets against the liabilities that are to be secured".

Paul Belok, principal and actuary at Aon Consulting, claimed the bulk annuity market had been affected by the "financial tsunami" hitting markets so much many of the schemes looking at buyouts earlier in the year are deferring their review until markets have settled.

"More recently, however, we have seen two or three insurers emerge with pricing that continues to offer value, and deals at the smaller and medium end have continued to transact," said Belok.

Belok added some schemes may feel they missed an opportunity to de-risk earlier in 2008 when prices were lower, and argyued there is therefore the need for schemes and advisers to develop a "road map" that identifies triggers for bulk annuity transactions, and prepare the way so schemes can "react swiftly if and when these circumstances arise in the future".

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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