EUROPE - Pension schemes looking to offload defined benefit (DB) risk by buying bulk annuities and longevity swaps will have to act fast to seal deals, as market volatility means prices will change rapidly, according to Towers Watson.

Providers of such risk transfer products believe the euro-zone crisis could close off some opportunities for pension schemes, but create new ones as well, a report by the consultancy showed.

Ben Stone, a senior consultant at Towers Watson, said: "Market turbulence will open doors then quickly slam them shut, so schemes need to work with providers to accelerate the completion of transactions and lock down the price in the run-up to the trading day."

He said the latest blow to scheme funding levels had made full buyout a more distant prospect for many schemes.
"However, this cloud has a silver lining," he said. "Buying in annuity policies to cover existing pensioners can be more affordable for those who have seen the value of their gilts outpace the rise in annuity prices."

Towers Watson said bulk annuities and longevity swaps covering £12bn (€14.7bn) of liabilities were signed in 2011, but added that this has been followed by a relatively slow start to the activity in 2012.

Stone said there had been something of an "end-of-year sale" in 2011 as providers cut prices to hit new business targets.

Schemes that will benefit from attractive pricing in the future will be those who have cleaned their data and set up effective decision-making structures, he said.

"Sometimes, providers with limited capacity may have to choose which schemes to engage with, and it is those who are transaction-ready who will be taken seriously," he said.

Separately, consultancy Aon Hewitt said the time was now right for DB pension schemes in the UK to de-risk by moving up to £200bn of money invested in gilts into buy-in policies.

Paul McGlone of the firm's Risk Settlement Group said: "Aon Hewitt's Bulk Annuity Market Monitor shows that it is currently a good time for pension schemes holding gilts to get an even better match with their liabilities by undertaking a pensioner buy-in.

"In doing so, trustees can close out some of their longevity, investment, inflation and interest-rate risk by securing an income stream from an insurer that matches outgoing pension payments."

Although he said buy-ins were not right for all pension schemes - particularly those not already holding gilts - McGlone said that, for most, they could be an important step forward in the process of de-risking.

The firm said a recent survey showed only 24% of medium-sized UK DB schemes were considering implementing a buy-in and only 2% had already done so.

Given that pricing on such products can be volatile in relation to the value of the assets held by schemes, the firm suggested a trigger mechanism could be used if the pricing was not acceptable initially, in order to avoid missing opportunities when conditions changed.

Martin Bird, managing principal at Aon Hewitt and head of the Risk Settlement Group, said: "It also does not matter if the pension scheme has insufficient gilts to match all the pensioners, as there are a number of ways to insure a tranche of the pensioner group in the scheme, thus enabling the removal of a significant slice of the longevity risk."