UK - The pension fund risk transfer market will grow to £50bn (€55bn) by the end of 2012 with more than a quarter of UK pension schemes outsourcing their liabilities, according to a report published today by consultancy Hymans Robertson.

In its Managing Pension Scheme Risk Report Q4 2010, the consultancy found that insurers and banks have already taken on £30bn in pension liabilities since 2006-07 via buy-ins, buyouts and longevity swaps. Of the deals worth £8.2bn that were struck last year, buy-ins and buyouts accounted for £5.2bn and longevity swaps made up £3bn.

Last year's highlights included GlaxoSmithKline's £892m buy-in with Prudential in December. But the consultancy noted several other large deals expected to complete in the first half of 2011, with around 20 more in the offing for "some of the UK's largest pension schemes".

Driving the growth of the risk transfer market is an improvement in market conditions over the past year, as well as a shift from the retail price index (RPI) to the consumer price index (CPI) as an inflation metric, allowing for more cost-effective liability transfers.

Buoyant M&A activity has also increased pressure on sponsors to reduce pension risk.

James Mullins, head of buyout solutions at Hymans Robertson, told IPE: "If you try to sell a business, purchasers will focus on the defined benefit (DB) scheme. The business will be more attractive if that risk is managed.

"Financial directors are taking the view that enough is enough. They don't want to be caught a third time and they want to be able to move quickly as and when things improve," he added.
Goldman Sachs' insurance subsidiary Rothesay Life - which specialises in asset swaps - dominated the market in 2010, with over a quarter of market share by value.

However, as it matures, the market is expected to move away from straightforward towards bespoke options.

David Collinson, co-head of business origination at Pensions Corporation said: "Every pension fund or sponsor is in a slightly different situation and an off-the-shelf product doesn't necessarily suit all of them.

"It depends not only on what they want to achieve, but on what restrictions there on how they'll pay it back - and when."

He cited one example where the Pensions Corporation last year insured a scheme at the point of deficit but accepted the premium payment over a five-year period.

Collinson said that while the report emphasised corporate pension schemes, the recent 'bonfire of the quangos' - which saw the UK government close a number of quasi-autonomous non-governmental organisations - would create a need in the public sector.

"Many quangos will be closed down or merged, and each has its own pension fund," he said. "Insurers can be the best way to manage the situation."

Despite reluctance to quantify the assets involved, Collinson said: "If you add up the assets, it will be in the billions, rather than the millions."