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Switch to CPI having impact on buyout market, says Pension Corporation

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  • Switch to CPI having impact on buyout market, says Pension Corporation

UK - The switch from the retail price index (RPI) to the consumer price index (CPI) when calculating inflation for occupational pension schemes has led to confusion over liabilities, which in turn has affected the insurance buy-in and buyout market, according to Pension Corporation.

David Collinson, partner and co-head of business origination at the risk management provider, said: "We are speaking to pension funds at the moment about flexibility in contracts on this issue, which will allow member benefits to be brought into line with any legislation, thus ensuring the member is not disadvantaged, yet receives the benefits of insurance today."

Full buyouts are generally more popular with smaller or medium-sized pension funds, according to Collinson, while buy-ins - where trustees retain the bulk annuity policy and the scheme remains an asset - require more time to discuss and therefore appeal predominantly to larger schemes.

Another trend in the market, Collinson said, is the spreading of payments for a buy-in or buyout and pensioner-only buyouts.

"One pension fund did not want to pay all upfront in a transaction with us, so we took over its real estate assets and leased those back to them," he said.

"Companies already behave in a similar fashion when they provide earmarked contingent assets. The payment can then be spread over a number of years."

He added: "While until today we have only had one large pensioner-only buyout in the case of Delta pension scheme, we continually talk about them with other UK pension funds.

"Although they require more decision-making from trustees, we expect more of them to take place in the future."

The latest pension insurance buyout to which Pension Corporation agreed was with independent timber merchant Arnold Laver. The transaction made use of a deferred premium over five years.

Pension Corporation has yet to transact its first longevity insurance deal, which Collinson put down to the fact pension funds cannot trade out of a longevity swap and that it is aimed mainly at large pension plans.

In a buyout or buy-in, the interest rate, inflation and longevity risk, as well as the assets, are transferred to an insurance company in exchange for bulk annuity contracts, which guarantee to pay a set of defined benefits, while in a longevity hedge only the longevity is transferred.
 

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