SwissRe 'buyout' team to target European schemes
UK/EUROPE - SwissRe has confirmed it is launching a new division of the company in September which specialises in de-risking solutions for pension schemes, including buyouts.
The global insurer will initially target larger pension schemes in the UK, with assets of around £500m (€628m), although it intends to extend its offering into Europe and the US, which it believes has a combined pension liability market of around £3trn.
Richard Farr, who joined Swiss Re as head of pensions at the end of 2007 from PricewaterhouseCoopers, said the company had decided to enter the market as it already specialises in taking on risk, and pension schemes contain a lot of risk.
"The key thing for us is to help schemes decide what risk they want to keep and what they want to get rid of and help them do it to their own timescale, as we do not think buyout is the right answer for most schemes," said Farr.
As a result, Swiss Re is developing a range of products using reinsurance and capital market expertise that will focus on four areas. This includes demographic risk, which encompasses longevity, mortality and morbidity (ill-health) risks, as Swiss Re has already taken on around $17bn of longevity risk in the UK in the last 18 months.
In addition, the firm said it is planning to develop a solution "in due course" to deal with the risk to the scheme of the employer covenant, as well as offering schemes an "end game" solution - that may or may not be a buyout - which helps pension funds to de-risk over time.
Farr said the firm believes the longevity solution will be "well-formed" by the September launch, as will the "hybrid" offering that would essentially be a longevity-based liability-driven investment (LDI) solution that combines longevity and market risk.
However, the 'end game' solution and the covenant offering are expected to take slightly longer, as these would depend on the specific circumstances of the scheme and solutions would need to be developed to the client's timescale.
Swiss Re also confirmed it is looking at possibilities for selling longevity risk into the capital markets, to investors such as hedge funds, in a similar way to the established market for insurance-linked catastrophe bonds.
Farr said: "We are launching in late September with a range of products, and will be creating further offerings as the market develops.
"Pension liabilities are estimated at £1trn in the UK, with a further £1trn in Europe and £2trn in the US. There is a huge market for us to go into. Europe is starting to develop nicely, but the US is probably at least another 12 months away," he added.
Farr pointed out the company is looking to build its position in the pension liability market over the next 5-10 years, with the aim of becoming pension schemes' "first port of call" for de-risking solutions.
However, Swiss Re's decision to enter the market comes amid rumours that Pension Corporation, in which Swiss Re has a holding, is to buy rival buyout firm Synesis Life, following Synesis' failure to complete a single buyout deal since its establishment two years ago.
At the time of publication Pension Corporation would neither confirm or deny the reports.
But Duncan Howorth, president of the Society of Pension Consultants (SPC), said the potential takeover of Synesis Life by Pension Corporation "is an excellent illustration of the emerging nature of the buyout market and the progress that is still to be made".
He pointed out of around 18 specialist buyout providers, only four have made "headway so far", and highlighted of the £8bn f transactions completed so far, 80% have been secured by six companies.
Howorth said: "Consolidation of this nascent buyout market will continue as the larger companies look to bolster their expertise in this innovative and under-established market."
However, he warned only the larger companies with a track record will see "significant deal flow" in the near term and claimed smaller companies will only be able to compete when the market "becomes bigger and more diversified".
"Until then, the larger companies will continue to dominate. At this point in time, care needs to be taken to ensure that this activity does not undermine confidence in this area of the market," added Howorth.
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