UK - The buyout market in 2009 is expected to rise by another £8bn (€8.55bn), similar to 2008, though the focus is likely to be on pensioner-only transactions, according to Lane Clark and Peacock (LCP).

In its January update on the buyout market, LCP estimated total business levels in 2008 had reached £8bn, slightly below the £10bn predicted this time last year, but this was still almost three times the £2.9bn reported in 20007.

The total level of business in 2008 was helped significantly by the £1.1bn buyout of Thorn in December, which followed what LCP called a two-month "shutdown period" for the industry between in October and November, as very little business was completed following the collapse of Lehman Brothers in September 2008. (See earlier IPE article: PIC snags remaining Thorn)

The consultancy suggested the "shutdown" was driven by many schemes close to completing buyout deals deciding to defer completion until insurers could price with more certainty - as some had withdrawn guarantees on quotes - and liquidity in investment markets improved.

LCP noted the buyout market in 2008 was dominated by a number of "pensioner buy-ins", allowing trustees to buy an insurance policy matching future pension payments, mainly because the prices in the first half of the year were generally lower than the funding reserves so there was no need to increase deficits or receive cash contributions from employers.

The actuarial consulting firm has predicted the focus of the buyout market in 2009 will remain on pensioner buy-in deals as, despite a sharp increase in buy-in prices in September, the prices have now "started to converge once again with a typical funding basis".

This means although prices are not as low as the first half of 2008, a typical scheme "could currently expect to complete a buy-in of their pensioners at broadly the same cost as their funding reserve".

LCP also highlighted evidence of increased competition in the buyout sector, as in 2007 Legal & General and Paternoster completed around 90% of the buyout transactions yet in a year Pension Insurance Corporation (PIC) had overtaken Paternoster to hold a 22% share of the market compared to Paternoster's 15%, and while L&G retained a 25% share, Prudential had 14% while Norwich Union and Rothesay Life both held a 9% stake in the market.

Despite this, LCP has warned "full buyouts over 2009 are likely to be limited to schemes that had completed investment de-risking programmes before the equity market falls in 2008", such as the Leyland DAF Pension Scheme which was taken on by PIC earlier this month in a £230m deal. (See earlier IPE article: PensCorp to deliver Leyland DAF buyout)

The report also suggested 2009 could see increased interest by pension funds in longevity hedging through swaps as it would allow trustees to retain investment control while also avoiding counterparty risk, and can be easier to execute than a buy-in or buyout.

LCP admitted the market is still in early development, but argued "in many ways the market for hedging longevity risk is in a very similar position to the buyout market at the start of 2007, with the potential for rapid growth if the pricing is seen as attractive".

Clive Wellsteed, partner at LCP, said: "Even with the gathering economic doom and gloom, we are upbeat about the market's prospects in 2009, particularly for transactions covering pensioners only. However, depressed markets mean that full buyout is firmly out of reach for most pension schemes invested in equities."

He argued pensioner-only transactions can usually be achieved without a significant cash injection from the employer, so "with most businesses suffering as the recession takes hold, risk can be reduced on the corporate balance sheet without tying up valuable cash".

"For trustees of pension schemes transferring risk to an insurance company is often a welcome trade-off against a deteriorating employer covenant and likely to be on the agenda for many pension schemes in 2009," added Wellsteed.

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