Pricing pressures fail to halt interest in full buyouts
UK - Pensions consultancy Lane, Clark & Peacock has seen an increase in the number of quotation requests for full pensions buyouts, despite warnings on the horizon of possible bulk annuity price increases.
Charlie Finch, partner at LCP, said even though evidence suggests the purchase of bulk annuities could be 10-20% more expensive in the future - should Solvency II come into effect in 2012 as planned - the firm has seen an increase in the number of requests from corporates and trustees for the pricing of buyouts.
"We have seen activity pick up over the last few months in calls for quotations. Some are pensioner buyouts but we are getting requests for full buyouts. We are seeing small schemes coming through with more calls for buyouts, but we expect to see larger schemes make requests over the coming months."
He continued: The logical step, once the pension scheme is closed to accrual and divorced from the [corporate] business, is to buy it out. So there is a lot of interest in pricing. But whether schemes will go through with it is not clear," he added.
His comments came on the back of an article due to be published in the September edition of IPE - as part of its focus on the UK pensions market - co-authored by LCP consultant Ken Hardman, explaining the direction the UK pensions buyout market is likely to head next.
More specifically, the article noted if Solvency II does go ahead in its current form insurers could be forced to raise buyout prices because they themselves are required to meet higher reserve requirements.
Authors Hardman and Finch argued if the insurance industry continues to believe the directive will be enacted in its current form "we expect they will start factoring it into pricing sooner rather than later".
At this stage, the pricing of the pensions buyout market is uncertain, in part because movements in recent months have been driven by underlying bond market yields rather than regulatory or other pressures.
That said, Finch is of the opinion that further innovations could be seen beyond the recent RSA Insurance deal, where the pension fund sold out of short-term corporate bonds and into longer-term government bonds, without needing to invest any additional capital.
"The [buyout] bargains available in 2008 are no longer out there. It's sure to push people more towards longevity. If you just go down the mortality swap route, you can do it without feeling the impact of Solvency II. I think it will push insurers and trustees to be more innovative. It is one of the great things about this market."
The LCP article on UK pension buyouts will be published in the September edition of IPE, as part of the Pensions In series.
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